Smoothing consumption fluctuations through household decisions on home improvement expenditure in Japan

Abstract

Purpose– The purpose of this paper is to investigate the housing improvement expenditure as a consumption smoothing strategy for Japanese households.Design/methodology/approach– Tobit estimation method is used to empirically investigate the role of home improvement expenditure in smoothing consumption for households in Japan using data from Japan Housing Demand Survey for 2003.Findings– Findings suggest that: households in Japan use home improvement expenditure to adjust fluctuation in income. Income-constrained elderly households reduce their housing consumption by not improving their homesceteris paribusin order to maintain their consumption levels. The mortgage repayment burden also plays an important role in home improvement expenditure decisions.Research limitations/implications– An implication of the analysis is that households who do not own houses may require policy intervention to maintain their welfare. Policies such as subsidies for renters in Japan need to be devised which will provide renters opportunities to smooth consumption. Further, reduction in home improvement expenditure leads to deterioration of quality of housing stock if economic downturn persists longer. This suggests that policies such as tax reduction, tax allowance or tax credit to bolster home improvement behaviour are needed during economic downturn to sustain quality of housing stock.Originality/value– The paper contributes to the limited literature on the role of home improvement expenditure as a consumption smoothing instrument for households. Those who do not own houses are constrained in maintaining their welfare during downturn. Findings are important for policy makers and paper makes some suggestions in this regard.