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Portfolio Selection of Financial Assets by Japan's Households*1

Why Are Japan's Households Reluctant to Invest in Risky Assets?

  • This paper was originally published in Japanese in the Bank of Japan Monthly Bulletin, November 1999 issue.

August 2000
Bank of Japan
Shinobu Nakagawa*2
Tomoko Shimizu*3

  • *1The opinions presented herein are the personal views of the authors, and do not represent the official opinion of the Bank of Japan or of the Research and Statistics Department.
  • *2Economic Research Division, Research and Statistics Department (Now: studying at University of California, San Diego), Bank of Japan.
  • *3Economic Research Division, Research and Statistics Department (Now: Budget Division, Budget and Management Office), Bank of Japan.
    E-mail: tomoko.shimizu@boj.or.jp

Click on ron0009a.pdf (205KB) to download the full text.

Abstract

  1. The breakdown of financial assets held by Japan's households shows that the ratio of safe assets, such as deposits, has been around 60 percent since the middle of the 1970s, while that of risky assets, such as stocks, increased temporarily to above 20 percent at the end of "bubble" era. It, however, has been substantially below 10 percent level since the middle of 1990s.
  2. Although the opinion that the percentage of risky assets would start to rise prevailed in the early 1990s in accordance with developments in financial liberalization, this has not been the case. This paper employs various survey data regarding households, including the Family Savings Survey (Management and Coordination Agency), as well as the Public Opinion Survey on Household Savings and Consumption (Central Council for Savings Information), to analyze why Japan's households are reluctant to invest in risky assets. We investigate in greater detail by comparing the current situation with the period before the 1990s, including the "bubble" era in Japan (focusing on "change"), and with the United States (focusing on "level").
  3. First, the household's portfolio selection model is estimated employing the change in percentage of each financial asset as dependent variable, and indexes of return on each asset and annual income as independent variables. The results show that in the 1990s, deteriorating return on risky assets and the increase in precautionary demand for safe assets due to uncertainties about income have been the main factors that make households more reluctant to invest in risky assets ("shunting to safe assets") than they were before the 1990s.
  4. Next, international comparison of risky assets held by households shows that this ratio is substantially lower in Japan. To analyze in detail the reasons, we compare the selection criteria for savings of Japan's households with the United States based on survey data. The survey result indicates that Japan's households attach importance to "profitability" of financial assets only half as much as those in the United States, while they put more importance on its "safety" and "liquidity." In addition, we calculate the degree of relative risk aversion in both Japan and the United States using Capital Asset Pricing Model (CAPM). The result also shows that Japan's households are two or three times as risk averse as those in the United States. These facts imply that the reason why Japan's households are essentially reluctant to invest in risky assets is that "structural factors" make them so, as well as the risk and return on financial assets.
  5. To specify those structural factors, we first examine information restrictions in selecting financial assets. In recent years, the opportunity to obtain information on investments has been gradually increasing for households in general. At the same time, however, the opinion that the necessary information on financial investment is insufficient has actually increased, according to the survey regarding requests by households to financial institutions. Meanwhile, looking at responses to questionnaires on risky financial products (stocks, investment trusts, etc), the majority respond "no interest" and "insufficient knowledge" of these products, which indicates that (1) the attractiveness of current risky financial assets is not understood well.
  6. Take, for example, stock investment, a typical risky asset. (2) It could be an unattractive option under the past commission fee system because there are many demerits to investing small amounts of money (i.e., there is no easy or simple investment tool).
  7. Furthermore, (3) the current taxation system of financial assets indicates that risky asset investment in Japan has less advantages when compared to safe assets such as deposits, and to stock purchases in the United States.
  8. It is often said that the Japanese reluctance to invest in risky assets is attributed to their "national character." Regarding this point, a series of tax reforms to establish and improve the postwar financial system (e.g., establishment of special treatment on deposits, called Maruyu) made households intent on safe assets, and made households reluctant to hold risky assets. This has gradually affected and shaped current household's investment behavior even today.
  9. Given the developments caused by the financial "Big Bang," it is widely expected that financial assets held by households will be directly inject into capital markets (i.e., firms) in the form of "risk capital." Before households will be more likely to invest in risky assets, it will be necessary to solve these problems; in particular, (1) the unattractiveness of risky financial products and (2) the inconvenience and ineffectiveness of risky asset investment. We expect that the complete liberalization of stock commission fees starting from October 1999 should be a breakthrough. Finally, we think online stockbroking could become an easy and inexpensive tool for households to invest in risky assets.