In this paper I report my most recent calculation of Japan's saving rate. It has been almost ten years since I realized that Japan's saving rate as compiled in the Japanese National Income Accounts was substantially overstated (see Hayashi (1986)). Since then I have had several occasions to update my calculation of adjusted Japanese saving rate. The last update is in Hayashi (1991). The calculation I report in this paper will incorporate not only the National Income Accounts data that became available since the last update but also recent criticisms made by Iwamoto (1994)

Hayashi, Fumio

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Japan's Saving Rate: An Update Fumio Hayashi Working Paper No. 89 Fumio Hayashi Columbia University Working Paper Series Center on Japanese Economy and Business Graduate School of Business Columbia University July 1994 23 May 1994 Japan's Saving Rate: An Update F u m i o H a y a s h i COLUMBIA UNIVERSITY 1. Introduction In this paper I report my most recent calculation of Japan's saving rate. It has been almost ten years since I realized that Japan's saving rate as compiled in the Japanese National Income Accounts was substantially overstated (see Hayashi (1986)). Since then I have had several occasions to update my calculation of adjusted Japanese saving rate. The last update is in Hayashi (1991). The calculation I report in this paper will incorporate not only the National Income Accounts data that became available since the last update but also recent criticisms made by Iwamoto (1994). 2. Why Japan's Saving Rate is Overstated For the sake of completeness, I will quickly summarize reasons why Japan's saving is overstated when compared to the U.S. saving rate; a more detailed account is in Hayashi (1986). There are two major differences between the U.S. and Japan in the way saving in the national accounts is calculated. One is the way depreciation is measured, and the other concerns treatment of government saving. In the U.S. national accounts complied by the Bureau of Economic Analysis (BEA) of the Commerce Department, depreciation is valued at replacement costs. That is not the case in Japanese national accounts, where depreciation is at historical costs or book value. Since replacement cost depreciation is larger than historical cost depreciation in an inflationary environment, Japanese depreciation is understated and saving (net of depreciation) is overstated. The second difference is that the BEA does not recognize government capital. Accordingly, for the U.S., government saving and hence national saving do not include - / -government capital formation, and GNP does not include service flows from government capital. 3. Calculating Japan's Saving Rate under the BEA Definition I now describe in detail the updated procedure for calculating Japanese saving rates from the Japanese National Income Accounts (NIA) that adhere to the BEA convention of valuing depreciation at replacement costs and excluding government assets. It consists of calculating replacement cost depreciation, net saving, and net national product. All variables involved in our calculation are listed in Table 1, along with the source table in the NIA if the variable is directly available from the NIA and the equation number if the variable is generated in our calculation procedure. 3.1. Replacement Cost Depreciation by Sector As noted in Iwamoto (1994), gross fixed investment in the flow section of the NIA, which we denote as GK, includes investment in nondepreciable assets (e.g., investment in land improvement) as well as investment in depreciable assets. In the nation's balance sheet in the stock section of the NIA, net fixed investment is divided between net investment in depreciable assets and net investment in nondepreciable assets which we denote as GKND. GKND is also gross investment because depreciation is zero for nondepreciable assets. However, the NIA does not provide a breakdown of GKND between sectors, and it is not possible to divide total investment in depreciable assets between sectors without imputations. The stock of depreciable assets (the capital stock) in the stock section of the NIA evolves according to where KDi is the capital stock of sector i (i = H (households), C (corporations), and G (gov-ernment)), GK{ is gross fixed investment, DEPT is historical cost depreciation, and REC{ is the value of the reconciliation account for sector i. Each of these terms is directly available from the NIA. EPA(1978, p. 233) states that the reconciliation REC^t) consists of the follow-ing four items: - 2 -where REVt is revaluation, GKNDi is the sector's investment on nondepreciable assets, DEPRi is replacement cost depreciation, and U{ accounts for the incorporation of Okinawa's capital stock in 1972: The NIA does not provide the breakdown of KEC{ into these four terms. However, EPA(1973, p. 233) states that revaluation is calculated as where P^t) is the asset price at the beginning of t and PA^t) is the average asset price during year t. It is not clear from EPA (1973) how the average price is calculated; we assume that Substituting (2) into (1), we obtain It is now clear why investment in nondepreciable assets, GKNDir is a debit item in the reconciliation account: gross investment in depreciable assets is given by GE^ (gross fixed investment) - GKNDi (gross (= net) investment in nondepreciable assets). The question is how to calculate DEPR^ for each sector i using these relations from data on KDj, GKi7 DEPH^ REC^ P., and GKND (= GKNDH + GKNDC + GKNDG). Hayashi (1986)'s procedure is to first use (4) with DEPRj replaced by DEPH^ to calculate REVi and then use (2) to solve for DEPRj.1 It ignores the term U^t) (which equals zero except for t = 1972) and, as pointed out by Iwamoto (1994), the term GKND^ Iwamoto (1994) also observes that DEPRi can be calculated without the replacement of DEPI^ by DEPH i in (4) by 1 Hayashi's (1986) equation Al contains a typographical error. Its last term should be [(P^t+1)-PAi(t))/PAi(t)]Ni(t) where N is net investment. His calculation used the corrected formula. - 3 -This can be obtained by subst i tu t ing (4) into (1') and solving for DEPR i. Iwamoto (1994) est imates the sector-specific va lue GKNDj from the economy-wide GKND (GKND) by2 Okinawa ' s capital stock, U^t) , is still ignored in his calculation. My calculation of DEPI^ follows (6) and (7), assuming that Ok inawa ' s capital stock at the beginning of 1973 is 1% of the nat ional capital stock for the sector. 3.2. Net Saving and Investment by Sector The capital t ransactions (use-of-saving) account of the flow section of the NIA for each sector i (= H, C, G) is w h e r e GJ^ is gross investment , DINV i is net inventory investment , DLAND i is net land purchase , DFA i is net increase in financial assets (referred to in the NIA as the "saving-inves tment gap"), SVGH^ is net saving (in the NIA definition), DEPH is historical cost depre-ciation, and CTRi is w h a t the NIA calls capital transfers receipts. Capital transfers are posi t ive for the corporate sector because of var ious capital grants from the government . They are negat ive for the househo ld sector d u e to gift and inheri tance taxes. SVGH cannot be taken as net saving for two reasons , because it is based on the historical cost deprecia t ion and because it does not incorporate net transfer receipts. For the househo ld and corporate sectors, the BEA definition of net saving for sector i, SVG_BEAi, should be (9) SVG_BEA i = gross saving after taking account of capital transfers - replacement cost depreciation = SVGHi + DEPH t + CTRi - DEPRi = GKi - DEPRi + DINVi + DLANDi + DFAi (for i = H, C). Iwamoto (1994) erroneously identifies GKND by land improvement investment available from Table l-[3]-15 of the flow section of the NIA. GKND is net(= gross) investment on nondepreciable assets available from the stock section. - 4 -The last line makes clear that, unlike Iwamoto (1994), I treat investment in nondepreciable assets as part of saving. For the government sector, since BEA does not recognize government capital, net saving should simply be equal to net purchase of financial assets (i.e., the general government budget surplus)3 Accordingly, for the household and corporate sectors, net investment after replacement cost depreciation, NLBEAj, should be defined as For the government sector, it is zero. Therefore, for each sector, including the government sector, we have The sum of DFAj over sectors should equal the balance on the current account up to statis-tical discrepancy. 3.3. Net National Product Since government assets are not recognized in the BEA definition, gross profits for the government sector should be deducted from the NIA definition of GNP to obtain the GNP under the BEA definition. As pointed out by Iwamoto (1994), net profits for the government in the NIA appear to be set to zero, so that gross profits equal historical cost depreciation in the NIA. Thus, the BEA definition of GNP equals the NIA definition of GNP less DEPH for the government sector. Therefore, the BEA definition of NNP is In his previous calculations (e.g., Hayashi (1986)), Hayashi used as DFA_G net increase in financial assets (excluding revaluation) available from the financial sub-account of the capital transactions account for the government sector. This should be equal to the saving-investment gap in the main capital transactions account, if there are no measurement errors. The difference between the two used to be small but in recent years it has become quite substantial. For 1992, for example, the saving-investment gap is 8.5 trillion yen whereas the net increase in financial assets is -3.8. The difference between the two is about 2.6% of GNP. - 5 -3.4. Calculation for 1955-1969 To implement the calculation described above for the earlier period of 1955-1969, we need to estimate asset deflators Pi which are available only since 1970. We use the value of the deflator for gross investment for the fourth quarter of the previous year available from the flow section of the NIA. More specifically, (14) P^t) = deflator in the fourth quarter of year t-1 for gross private investment (i = H, Q , PG(t) = deflator in the fourth quarter of year t-1 for gross public investment expendi-ture for general government. The deflator is calculated as the ratio of nominal to real values. Nominal and real values of gross private and government expenditures for 1955-1969 are available from Table l-[3]-l of EPA (1991). 4. Results Results of my calculation for the period 1956-1992 are contained in Tables 2 and 3 (we cannot calculate depreciation and hence saving and NNP for 1955 because we do not have P^t) for t = 1955). Table 2 displays depreciation at historical costs and replacement costs by sector. I report depreciation on government capital even though it does not go into the calculation of net saving and NNP. The large discrepancy between historical and replacement cost depreciation for government implies that net government capital formation in the NIA is severely overstated. Net saving reported in Table 3 reflects the depreciation adjustment and the adjustment for capital transfers described above. Since the sum of capital transfers over sectors is very small, amounting to net transfer receipts to foreigners, the capital transfer adjustment has very little effect on national saving, although it somewhat affects the alloca-tion of national saving between sectors. Table 3 also displays net investment and net national product. The implied national saving rate is graphed in Figure 1, along with the unadjusted saving rates. The thin solid line is the national saving rate in the NIA. It includes govern-ment capital formation in national saving and depreciation is at historical costs. The thick dotted line excludes government capital formation but depreciation is still at historical costs. - 6 -The thick solid line is based on the fully adjusted saving shown in Table 3. Figure 2 shows the breakdown of adjusted the national saving rate between the three sectors. Finally, Figure 3 graphs net national saving, net investment, and the current account. The current account here is the difference between net national saving and net investment and equals the sum of DFAi over sectors. References Economic Planning Agency (1978), How to Read and Use National Accounts (in Japanese), Government of Japan, Tokyo. Hayashi, F. (1986), "Why is Japan's Saving Rate So Apparently High?", in S. Fischer ed., NBER Macroeconomics Annual 1986, MIT Press, Cambridge, Mass., pp. 147-210. (1991), "Rejoinder to Dekle and Summers", Bank of Japan Monetary and Economic Studies 9, September, pp. 79-89. Iwamoto, Y. (1994), "Japan's Saving Rate is Indeed Lower Than Professor Hayashi Revealed", mimeo., Institute of Economic Research, Kyoto University. - 7 -Table 1: Relevant NIA Tables - 8 -Table 2: Depreciation at Historical and Replacement Costs in trillion yen - 9 -Table 3: Net Saving and NNP, BEA Definition in trillion yen - 10-Figure 1: National Saving Rate Percent of Net National Product Figure 2: Breakdown of National Saving Percent of Net National Product Figure 3: Saving and Investment Percent of Net National Product 

Japan's saving rate: An update

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Japan's saving rate: An update

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