Japan has just announced that its national savings rate rose to 5 per cent in 2009, from 2.2 per cent in 2008. But already some analysts are predicting a sharp reversal in the trend. Goldman Sachs’ Chiwoong Lee thinks the rate is about to turn negative.
From a Monday note:
The savings rate can generally be explained by demographic factors to a large extent. The life cycle theory says that consumers’ spending behavior is determined by their lifetime income. Retirees have a negative savings rate because they are spending assets they accumulated in the past, and with Japanese society as a whole aging, this is determining the long-term trend in the savings rate. The rise in the savings rate in 2009 cannot be explained by demographic factors: Japanese society continues to age, having a negative impact on the savings rate. However, there are other factors at work also.
In addition to demographic determinants of the long-term trend, there are factors that affect short term trends, including (2) the wealth effect of changes in household net worth, and (3) temporary divergences between income and spending due to changes in the economy and sentiment or government policy.
(2) Change in net wealth The wealth effect also had a negative impact on the savings rate in 2009 as the margin of decline in net worth narrowed (meaning the negative wealth effect was smaller in 2009 than in 2008).
(3) Divergence between income and spending due to changes in sentiment This leads us to conclude that a temporary but significant divergence between income and spending was the main factor behind the sharp rise in the savings rate, as sentiment deteriorated significantly due to the financial crisis and spending declined more than income as a result.
Which means, Goldman says, more spending and less saving going forward. Consumption is being buoyed by things like the consumer electronics eco-point programme — while savings are declining as income growth rates stagnate.
In fact, Goldman reckons the savings rate will fall to around 0.2 per cent in 2010 and minus 0.5 per cent to –1.3 per cent this year. All of which might be good news for the Japanese economy and things like global imbalances — but very bad news for JGBs.