THE APPLICABILITY OF THE LIFE-CYCLE HYPOTHESIS OF SAVING TO JAPAN

Abstract

The high rate of saving in Japan, especially the high rate of household saving, is a well-known phenomenon but one which is still not fully understood in spite of the considerable research that has been conducted on the subject.1* In particular, little is known concerning the issue of whether the life-cycle hypothesis applies to Japan and whether it can explain the high rate of household saving in Japan. I believe that it would be interesting to investigate these issues more fully for the following reasons: First, such an investigation might shed some light on the factors underlying the high rate of household saving in Japan. Second, although extensive empirical tests of the life-cycle hypothesis have been conducted using data from the United States and other countries, the evidence is frequently contradictory, and as a result, economists are deeply divided concerning the validity and explanatory power of the life-cycle hypothesis.2) Therefore, additional evidence of any kind would help to settle the controversy. Third, it would be interesting to ascertain whether the life-cycle hypothesis is applicable in a nonWestern society with a different culture, set of values, etc. A key difference is the greater strength of the family unit in Japan, as a result of which intergenerational transfers and extended-family living arrangements are far more common. Such values and practices have allegedly weakened in recent years in Japan, but the evidence to be presented later will suggest that they are still very much alive and hence capable of influencing household saving behavior in a number of important ways. Fourth, in addition to the cultural differences mentioned above, Japan also exhibits a number of institutional differences which have a bearing on household saving behavior. For example, Japan is the only country I know of in which a sizable fraction of the workforce receives a lump-sum severance payment upon retirement that is typically equal to two-and-a-half to four times their regular annual salary. Moreover, some corporations pay pensions in lieu of, or in addition to, these retirement payments, and