The Japanese Saving Rate

There have been substantial differences between the Japanese and U.S. saving rates in the last 40 years, which have motivated extensive research in this area (see Figure 1). Despite much work, economists have not been able to quantitatively account for the differences in saving rates. In an earlier work, Lawrence J. Christiano (1989) shows that a relatively low initial capital intensity alone is not sufficient for the standard neoclassical model to generate saving rates that come close to replicating Japan’s saving rates. Fumio Hayashi et al. (1988) find that housing finance institutions and tax policy do not offer a complete explanation of the large gap between the average U.S. and Japanese saving rates in the 1970s. Other factors that may be specific to Japan, such as differences in preferences, the bonus system, high housing prices, high educational costs, and high marriage costs, are also considered in the literature. There does not appear to be a consensus on the importance of any of these factors. In this paper, we show that changes in the total factor productivity (TFP) growth rate alone can generate most of the secular changes in the Japanese saving rate. In the context of a standard growth model, fluctuations in the TFP growth rate change the household’s incentive to save. The observed humps in the saving rate in this period are basically due to relatively high TFP growth rates resulting in high saving rates, as households enjoy temporarily high interest and wage rates. In the long run, as the Japanese TFP growth rate converges to its steady state, which is in line with the U.S. TFP growth rate, the saving rate declines. We use a one-sector, neoclassical growth model with an infinitely lived representative household facing complete markets, and calibrate the economy to Japanese data provided by Hayashi and Edward C. Prescott (2002) for the 1956 –2000 period. We conduct deterministic simulations taking the actual capital stock in 1956 as an initial condition. We take the actual time paths of the population growth rate, the tax rate on capital income, the depreciation rate, the share of government expenditures in GNP, and the TFP growth rate for that time period. We show that when a constant TFP growth rate is assumed, the neoclassical growth model generates a saving rate that does not resemble the data. Once we introduce the time path of the TFP growth rate, however, the model generated saving * Chen: Department of Economics, University of Oslo, Blindern, N-0317 Oslo, Norway (e-mail: kaijic@econ. uio.no); A. İmrohoroğlu: Department of Finance and Business Economics, University of Southern California, Los Angeles, CA 90089 (e-mail: [email protected]); S. İmrohoroğlu: Department of Finance and Business Economics, University of Southern California, Los Angeles, CA 90089 (e-mail: [email protected]). We would like to thank Narayana Kocherlakota, Henning Bohn, and the seminar participants at UCLA, University of California at Riverside, University of Pittsburgh, Bilkent University, Sabancı University, Koç University, Stanford University, and the Annual Meetings of the Society for Economic Dynamics at Budapest for helpful comments. 1 Hayashi (1988) provides a comprehensive dataset which corrects for differences in accounting and measurement standards between the two countries. Two major differences are noted. First, Japanese National Income and Product Accounts report depreciation based on historical cost, as opposed to the replacement cost of the United States. Second, government investment is explicitly accounted for in Japan, whereas in the U.S. all government purchases are classified as government consumption. 2 See Charles Yuji Horioka (1990) for a survey. 3 More recently, R. Anton Braun et al. (2005) find that the combined effects of demographics and slower TFP growth can explain the observed decline in the saving rate after the 1990s. 4 Our approach is in line with the recent use of the one-sector growth model to explain “Great Depressions.” In particular, we follow the methodology of Harold L. Cole and Lee E. Ohanian (1999) and Timothy S. Kehoe and Prescott (2002).