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When it becomes too late to save

By Eddie Lee, The Straits Times,  Singapore

October 8, 2003

WHEN it comes to national characteristics, the Japanese are as renowned for their frugality as Americans are for their love of spending. It was Japanese savings which were critical in mobilising the investment required for Japan 's post-war economic miracle. Hail the Japanese saver.

Americans, in contrast, are famous for shopping till they drop. And lately, they have had their wallets filled by a huge wave of mortgage refinancing, home equity loans and tax cuts.

So despite terrorism, war and plunging stock prices in the past three years, their spending binge has continued. In fact, they have single-handedly supported the US economy. Hail the US consumer.

So you see, there's more in common between the Japanese and Americans than meets the eye: They have both played the role of unsung heroes.

There's another unlikely similarity - both countries have witnessed a precipitous drop in their savings rate during the past decade. Coming at a time when global pension systems are also being put to the knife, what if consumers arrive in old age inadequately prepared?

The latest official figures from Japan show a drop in the personal savings rate to 6.9 per cent in 2001 from 14 per cent in the early 1990s. Mr Osamu Tanaka, an economist with Morgan Stanley, estimates that Japan 's savings rate probably fell further to 4.3 per cent last year and currently stands at below 3 per cent.

If he's right, then Japan 's personal savings rate is about equivalent to that of the United States , which hovers at just above 3 per cent.

But while we know how America got there, Japan 's case is more intriguing. The Japanese economy has stagnated for over a decade. You would expect consumers to suppress spending in the face of continuing uncertainty. And yet, the legendary Japanese saver is no more.

One argument for how this state of affairs has come about is that the low interest environment is destroying the incentive to save. The statistics show that the drop in Japan 's savings rate has come from spending habits remaining fairly stable while incomes have declined. Accustomed to a certain lifestyle, Japanese households have not been able to cut back on spending as much as the squeeze in income.

A recent study of Tokyo residents by ad agency Dentsu, for example, noted an increase in the percentage of Japanese agreeing with statements such as 'Life isn't fun if you economise all the time' and 'It is fun to buy things you desire'.

Another reason for the drop in the savings rate is the increase in the number of unemployed older workers who have to tap into their savings. Early retirement programs and the dismissal of older workers have worsened this trend. The percentage of households headed by unemployed persons age 60 and over increased to 22 per cent last year from 12 per cent in the early 1990s.

What makes this situation particularly worrisome is that savings have begun to decline ahead of Japan 's ageing society. Japan 's population is expected to reach a peak only in 2006 before starting to shrink - which is when it would be natural to expect a fall in the savings rate as more older people tap into their assets in their retirement years.

But an annual survey by the Bank of Japan (BOJ) released two weeks ago shows savings have been shrinking so quickly that one in five Japanese households already has no financial assets. No savings, insurance or investments.

The last time that so many Japanese had nothing in their kitty was when the survey was first conducted in 1963 - a time when Japan was more famous for exporting tin plate toys than cars.

Things were brightest during the boom years of the 1980s, when the percentage of Japanese with no savings was just 3.3 in 1988. The deterioration has been dramatic in recent years, with the ratio first rising above 10 per cent in 1996, and jumping 5 percentage points in the latest survey.

No doubt Japan 's economy has perked up in recent months, but it's an economy standing on the edge of a precipice. The improved sentiment appears to be largely due to large companies with brighter export prospects.

Domestically, given the lack of purchasing power, there's little reason to invest. And there is the danger that an incipient economic recovery is snuffed out by the vain attempt by savings-short Japanese to put some money in the kitty.

But for the economy, it's too late to start saving. Unless wages rise, consumer spending may not hold up for long, and if spending were to decline along with falling wages, that would spark a downward spiral in both demand and income.

How Japan copes will offer lessons for other countries facing similar trends down the road. It's a fatal mixture of recession and an ageing population. A falling savings rate is the alarm bell. In Europe , personal savings rates among the weakest economies such as Germany and Italy have dropped by about half in the past decade.

And in case you missed a little detail two weeks ago in The Sunday Times story 'Middle-class pinch', 13 of the 40 Singaporean households surveyed confessed they weren't able to save. That's one in three households.

To be sure, it's a small sample. But the pinch is looking more like a squeeze. Singaporeans appear to be already tapping into their savings, and it's not because they are profligate spenders. Private consumption growth averaged just 1.6 per cent in the past two years.

The problem is that income barely grew. Consequently, the personal savings rate slipped to just 2.7 per cent last year from just under 4 per cent two years earlier. In 1997, the savings rate was 7.2 per cent.

To some extent, there are similarities between Singapore and Japan . We are at an age when individuals start planning their retirement years; the median age of heads of households is now 40. But, given current circumstances, many have been unable to do so.

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