Personal Savings in Japan: a Study on Postal Savings Deposits and Commercial Bank Deposits

Note: This article was written in January 1999.

I

             Personal savings in Japan is a very broad topic. Many studies examine the Japanese saving from generality (such as  Blumenthal(1970), Komiya(1966), Mizoguchi, T.(1970), Shinohara(1959) ) to specifics (such as Boskin and Horioka(1989), Dekle(1988), Hayashi(1986), Horioka(1985,1988), Maki(1989), Shinohara(1982,1983), Shibuya(1987)). None of these specifically touched upon the comparison between postal deposits and commercial bank deposits.

             The hypotheses of this paper are as follows:

1.       The moving trend between the postal savings deposits rate and the commercial bank deposits rate reflects the real economic situation perceived by the people more than changes in the financial regulatory reform caused by financial liberalization and internationalization. In other words, the real economic situation perceived by the people pays more influence to the moving trend between the postal savings deposits rate and the commercial bank deposits rate than the changes in the financial regulatory reform caused by financial liberalization and internationalization.

2.       In connection with the above hypothesis 1, let us assume that the concept of risk-aversion behavior of Japanese people is true. Then, amid the uncertainty of the economic recession situation, if the people tend to save their money in postal savings deposits rather than in commercial bank deposits, it can be logically implied that Japanese people perceive that putting their money in postal savings deposits is less risky taken than putting money in commercial bank deposits.

3.        Again, if we assume that financial regulatory reform means the more choices for the people to save their money (because there are various financial innovations such as new financial markets, new assets and new methods of trading), the postal savings deposits rate and commercial bank deposits rate should go down in the long run. People have more choices to choose where to save money.

             In term of risk-aversion mentioned in the hypothesis2, may I recall the work of Aoki(1986, p.579), who finds that Japanese households hold most of their savings in the form of safe assets such as bank deposits and postal savings accounts despite the much higher after-tax returns on stockholdings (during the 1964-1984 period, the average annual rate of after-tax return from stockholdings of listed corporations was about 17%, whereas the average annual deposit rate was about 5%). This evidence suggests that Japanese investors are, on average, very risk-averse, and the degree of risk aversion may have contributed not only toward skewing the portfolio allocation of households toward relatively safe assets but also toward raising the overall level of household savings.

             Moreover, the fact that public opinion surveys find that preparation for illness and other unforeseen emergencies is by far the dominant motive for savings in Japan is further evidence that the Japanese are risk-averse and that this helps to explain their greater propensity to save, and the fact that the proportion of households savings for precautionary motives and the level of the household saving rate show parallel movements over time suggests that the risk-averse behavior of the Japanese can also explain trends over time in Japan's household saving rate (Kurosaka and Hamada, 1984, p. 118).

             Although the work of Aoki, and Kurosaka and Hamada did not intentionally distinguish between postal savings deposits and commercial bank deposits, their idea of risk aversion can be applied to this study by giving the assumption that there are differences between postal savings and commercial bank deposits. At this point, I've not found any studies arguing the perception of Japan people whether they think putting money in postal savings is more stable than in Commercial Bank savings. However, as already stated in my hypothesis amid the uncertainty of economic recession, if people tend to put their money in postal savings rather than commercial bank deposits, we can imply that people perceive that saving in commercial bank is more risky than postal saving which is entrusted to the Financial  Ministry's Trust Fund Bureau plus its long time operation since 1875.

             Following are the objectives of this paper; first, to understand the unique savings institution of Japan - the postal savings system; second, to understand the gradual changes in Japanese financial market caused by liberalization and internationalization; third, to analysis the trend of postal savings deposits rate compared to the trend of commercial bank deposits; fourth, to understand, through the aspect of postal saving and commercial bank savings, how the Japanese people behave themselves amidst changes in economic situation; fifth, to analysis what can be the policy implication regarding the changing trend between postal saving deposits and commercial bank deposits.

             In order to find out the mentioned hypothesis and pursue the above objectives, the content of this paper will be set into these following manners; first, introduction which will be included the hypotheses, objectives, scope and concept used in this study; second, a brief look on the Japanese commercial banks and the development and its uniqueness of Japan postal savings; third, a brief look on the development of financial regulatory reform through the liberalization and internationalization; fourth, the comparison of growth rate of postal savings deposits and commercial bank deposits and the analysis; fifth, conclusion and policy implication.

II

             There are three major types of financial institutions in Japan: a central bank, private-sector institutions and government institutions. Private-sector financial institutions comprise commercial banks, various types of banks and other depository institutions specializing in particular areas of finance, securities companies, life and non-fife insurance companies and money market dealers (Federation of Bankers Associations of Japan (Zenginkyo), 1994, p. 5).

             Commercial banks are established in according with the Banking Law and have a license from the Ministry of Finance. They particularly focus on deposits, lending and funds transfer, handling medium and long-term finance as well as short-term finance, transactions with corporations of all sizes and with individuals and international and domestic finance (Zenginkyo, p. 17).

             The Japanese financial system is notable for large share claimed by public financial  intermediaries, and for the fact that the institutions which raise funds are not the same as the institutions which invest them (Zenginkyo, p. 30). Among government institutions, which are comprised of government financial institutions, banks and public corporations, one of the major fund raiser is the postal savings system. The fund it takes in is entrusted to Ministry of Finance' s Trust Fund Bureau, which then loans the money to government financial institutions. These institutions in turn make funds available to specific groups of companies or individuals as defined by government policy.

             The postal savings system was established in 1875 to promote small-volume personal savings to stabilize the lives of the general public. There are 24,600 post offices (Masayoshi, 1998, p. 4) around Japan that accept deposits, which is roughly equal to the total number of bank and shinkin bank branches. The major position of deposits is Teigaku time deposits (Teigaku time deposits have a minimum deposit time of six months, but can be withdrawn any time thereafter, up to a maximum of 10 years). Since the system was established specifically to promote small-volume savings, deposits are limited to 10 million yen per individual.

             As of the end of FY1996, Japan's postal savings outstanding balance reached a total of 224.9 trillion yen ($1.8 trillion) - more than any other financial institution inside or outside of Japan. The money from these accounts is entrusted to the Finance Ministry's Trust Fund Bureau where it is used to fund various Fiscal Investment and Loan Programs. Known as Japan's "second budget", it plays a major role in everything from social capital and official development assistance to financial retrenchment programs. According to the Ministry of Post and Telecommunications' estimates, 44% of the 377.25 trillion-yen fund for Fiscal Investment and Loan Programs comes from postal savings accounts (Masayoshi, p7).

III

             It is said that appropriate investment opportunities and financial methods in Japan are not available to households and firms, which suggests that in Japan's financial and capital markets, the financial intermediary system does not function adequately, with financial mediation conducted inefficiently. If this is true, explanation behind this is legislation and regulations, business practices and other systems in the financial and capital markets. As a front-runner to financial system reform, domestic and foreign capital transactions will be further liberalized (Economic Planning Agency (EPA), 1997, p.149). Consequently, liberalization and regulatory reform in the financial market inevitably effects the changing trend between the postal savings and commercial bank deposits. Before we reach the analytical part of the changing trend between the postal savings deposits and commercial bank deposits. It is necessary to take note here concerning, in some aspects, of Japan financial liberalization and regulatory reformation.

             It is known that regulatory reform caused by liberalization and internationalization leads to the changes in financial market. Examples can be given. Let us start with the shift from bank lending to equity financing. Vogel (1996, p. 173) concluded that by the 1970s the banks' best customers-those large industrial firms with the best credit ratings- were increasingly raising money in the Euromarkets rather than borrowing from the banks. Big business reliance on bank loans declined from 30.2% of funds in 1973-77 to 17.5% by 1978-82. The city banks' share of the overall financial services market declined from 35.4% in 1970, to 31.6% in 1975, to 25.8% in 1980.  Later on the banks had the right to sell and deal in Government bonds, while securities firms were allowed to market medium term government bond funds. In compliance with the international (US) pressure, Japan in the middle of 1980s liberalized the Euroyen bond market and allowed foreign institutions to set up trust subsidiaries.

             After these moves, Japan started liberalizing interest rates but the process went about deliberately and slowly. The Ministry of Finance began liberalization with the largest time deposits. It create a drawn out schedule of liberalization, with incremental decreases in the minimum amount for market rates being announced at precise six-month interval. The liberalization schedule was used as a warning to the smaller and weaker firms to strengthen their management or to link up with other banks (Vogel, 1996, pp. 178-179).

             In October 1994, with further development of the liberalization process, Japan lifted restrictions on all demand deposit interest rates. Even so, few banks raised their rates significantly and 90% Japanese banks kept their rates on ordinary account within a narrow band of 0.22 to 0.25% per year (Vogel, p.180). From the past, liberalizing saving interest has progressed gradually, initially with interest on large deposits, and when this liberalization was almost completed, moves were made toward the liberalization of interest on small deposits. Liberalization of interest deposit (10 million yen or larger) began in 1979 with the introduction of certificates of deposit (CDs). In 1985 Money Market Certificates (MMCs) and time deposits with non-regulated interest rates were introduced (EPA, p. 155).

             In light of the segmentation of the financial system in 1992, new regulation came up. Since then, banks would be allowed to underwrite bonds but not to sell stocks. Banks and security firms starting trust subsidiaries could introduce non-money trusts such as real estate and bond trusts, but they would not be able to manage pension funds. The Ministry of finance issued the first securities subsidiary licenses to the long-term credit banks and trust banks in July 1993 and city banks in 1994. As of December 1995, banks had established seventeen securities subsidiaries and six trust subsidiaries, and the "Big Four" securities houses had each set up a trust subsidiary (Vogel, p. 189).

             Concerning to the securities market under Ministry of Finance guidance, Vogel (p. 190) added that the Tokyo Stock Exchange (TSE) reduced commission rates four times from 1985 through 1990. The Securities and Exchange Council began deliberations on outright liberalization in 1992 and began by liberalizing trends over 1 billion yen in April 1994. Since 1991 the Ministry of Finance has taken several cautions steps toward reform. For example, the Ministry has relaxed the criteria for shelf registration and expanded the number of eligible issues from about 300 to 600.

IV

              The previous section gives us some ideas of the gradual changes in Japanese financial market. This section will carefully analysis the changes on the rate of postal savings deposits and commercial bank deposits. The general profile of economic situation and regulatory reform in the context of liberalization will be provided to analysis the changes.

             From the figure above, during the last 20 years, there were two sharp rise in postal savings deposits from 1979-1980 at the time of the 1979 second oil crisis and from 1990-1991 at the time of the burst of bubble economy, implicitly reflecting the tendency of people in putting money in more what they perceived as stable compared to private business. In the late 1970s, sharp decline was seen in both postal savings deposits and commercial bank deposits. The decline in postal savings deposits and commercial bank deposits in late 1970s reflected the development of capital markets. It is commonly known that the financial market is an arena for the accommodation of capital from saving surplus actors (such as households) to saving deficit actors (such as firm). Capital flows not only through banks but also other financial  intermediary institutions including stock markets. Such capital distribution channels provide people with, I may call, menu of choices. When people or households participate in the financial  market, they can obtain benefits from various capital operations supplied by financial  intermediary institutions and the capital market. By doing this, risks are distributed appropriately.

             Because of the sharp rise of postal savings deposits rate and the sharp fall of commercial savings deposits rate in 1979, the commercial banks reacted to this situation by strengthening their demands for financial innovation. They introduced Certificate of Deposit (CDs) (and Money Market Certificates (MMC) in 1985) with interest rates tied to open-market rates. In addition, they liberalized interest rates on large denomination time deposits over 100 million yen. (Suzuki, p.18 and 47 and EPA, p.155).

             In the late 1970s and the beginning half of the 1980s, the postal savings deposits rate was above the commercial bank deposits. It can be explained that interest rates at the banks were strictly controlled, so the banks has not been able to respond to the increased preference for high-yielding assets. This inflexibility caused a major shift into postal savings deposits. The shift was due to the provision by the postal saving system of ten-year, high-yielding, fixed-interest deposits that could be withdrawn after only six months without penalties. (Suzuki, p.31)

             By the end of 1985, there was a complete liberalization of interest rates on deposits of three months to two years with a minimum deposit of 1 billion yen. In 1986, the minimum deposit was lowered to 500 million yen. In addition, the maturity of CDs and money market certificates was extended to instruments of up to one year in maturity. Changes schedules for 1987 include further reductions in the minimum size of deposits with free interest rates and of money market certificates, along with an extension of the maximum maturity of money market certificates to two years. Before April 1988 the interest on postal savings was tax-exempt to encourage saving. After that, postal savings deposits are subject to the same 20% withholding tax as deposits with other financial institutes. This continued liberalization brings the commercial banks saving in the position (from 1986 - 1990) that is above the postal savings rate. Although in 1994 the liberalization process on all demand deposit interest rate was completed, during this time because of economic stagnation the commercial banks deposits rate is far below the postal saving deposits rate.

             Japanese economy has been in its situation of stagnation and recession since the bursting of the bubble around 1991. Since 1992, it has grown less than 1% a year in real term. In fiscal 1997, it recorded a negative growth rate of -0.7%, the worst in the post-war period. Since 1991, the Japanese economy has been dragged by the troubled financial  sector burdened with a huge amount of bad loans. People' s lost their trust in private financial  sector. After 1990 a sharp rise in postal savings deposits rate emerged, while there was a sharp fall on commercial bank deposits rate. The growth rate of commercial bank deposits was a little over 1% in 1992.

             However, since 1992 the postal savings deposits rate is going down whereas the commercial bank deposits rate is going up. This can be a coming good sign in term of economic outlook, which is better than the past few year although it would be too early to conclude that it is a better sign.

             At this junction, we can line analyses and judge whether our hypotheses are or can be relevant. Here, because of without mathematical analysis, we need a model and more lines of explanation before reaching the conclusion in order to see the issue clearly. I may conclude this paper into a structure shown below:

Dot line is menu-of-choices line, meaning that people can choose where they can save their money. 'A' line means people put their money in the commercial bank deposits. 'B' line means people put their money in postal savings deposits. C line means people put their money in other financial institutes.

             Model explains that economic situation causes impacts to every variable/actor. Financial reform has influence on the financial markets and the people.  The people can choose where they can save or invest their money in financial markets. Impact 1 is the impact from economic situation to the people and how the people financially react to the situation depending on their perception to the situation. The people can react to the situation by putting their money in commercial bank deposits (A) or postal savings deposits (B) or whatever (C). Impact 2 is the impact from financial reform to the people and how the people react to it depending on their perception to that reform. Also, the people can react to the reform by putting their money in A or B or C.

              For first hypothesis, we want to know whether impact 1 pays more influence to A and B than impact 2. From our observation in this section, financial regulatory reform causes changes in the movement of both commercial bank deposits and postal savings deposits. However, economic situation caused changes in the movement of commercial bank deposits and postal savings deposits more than the financial reform. For example, in 1991 (one year after the burst of bubble economy) the movement of growth rate of postal savings deposits jumped up from 1.3% in 1990 to 14.2% in 1991, the movement of growth rate of commercial bank deposits jumped down from 13.8% in 1989 to 1.3% in 1992. The movement of savings growth caused by regulatory reform changed not much compared to the cause by the economic situation. After the bank introduced CDs and liberalized interest rate on large deposits, the movement of saving growth in commercial bank deposits was up 11% in 1981 from 8% in 1980. After the amount of lifting of tax-exempt in 1988, the movement of postal savings growth rate dropped from 7% in 1988 to 1% in 1990. The reason why the movement of savings caused by financial reform went slowly compared to the cause from the economic situation is that financial reform in Japan is conducted gradually and deliberately, while economic situation happens so sudden and unexpected.

             Second hypothesis, we want to know "Is it true that the rate of saving in postal savings is more than the rate of saving in commercial banks during the uncertainty of economic situation?" If the answer is yes, what is the logic behind? Within the concept of risk aversion, it could be implied that the people perceived that putting money in postal savings deposits is more stable or less risky than putting money in commercial bank deposits. According to our observation, there were two period of economic uncertainty, one is during the second oil crisis and the other one is during the burst of bubble economy. These two periods, rate of saving money in postal savings deposits is larger than rate of saving in commercial banks, although the interest rate of postal savings is lower than interest rate of commercial banks (interest rate on Teigaku saving is set about 0.95 times slightly lower than the average interest rate of banks' three-year time deposits (Postal Saving Bureau, 1997, p. 11)). Therefore, within the concept of risk aversion, we can imply that people perceived that saving money in postal savings deposits is less risky than in commercial bank deposits.

             Third hypothesis is that because financial regulatory reform creates more choices for the people to save in the financial market, rate of saving in both commercial bank deposits and postal savings deposits should go down in the long run. From the observation, it is the case that if we pay more attention over the long term (see the figure again), while there were fluctuations induced by both economic situation and financial reform during and after the bubble period, generally speaking, there was a long-term downward swing in line with the financial reform.

V

             Proceedings are the conclusion:

1.       Both economic situation and the financial regulatory reform play a vital role in the moving trend of the postal savings deposits rate and the commercial bank deposits rate.

2.       Compared with the changes in the financial regulatory reform, economic situation abruptly plays more influence role to the trend of postal savings and commercial bank deposits rate.

3.        The result of finding implied that Japanese people perceived that putting their money in postal savings deposits is less risky than putting money in the commercial banks.

4          Regulatory reform has an influence role to the trend of Commercial bank deposits rate and postal savings deposits rate. The rate of postal savings and commercial bank deposits is gradually decreasing in the long run because of the regulatory reform.

Policy Implication

1. In the course of government level, postal savings plays its important role in the source of government' s Fiscal Investments and Loans Programs (FILP). The FILP distributed funds to many parts of government body and projects. During economic recession, the rate of postal savings is still high, ensuring of the money resource for the government. Therefore, by having postal savings, it is merit to the Japanese government. However, government must use this savings (through FILP) effectively. Recently, the Economist (Dec 12-18, 1998 issue) reported that the quality of FILP financed project has dropped sharply because it supported projects that bear high risk and return low yields.

2. In light of overall economy concerned, postal savings deposits is like an adjuster to economy. During the high growth period, rate of postal savings is low but during the low growth period, rate of postal savings is high. For the past 20 years, the moving trend between postal savings deposits rate and commercial bank deposits rate seems to be in opposite direction (see the figure). In this regard, the postal savings account can be used to adjust the overall economy.

4.       In the eyes of commercial banks, postal savings can be seen as an enemy because the

 commercial banks loose their margin in term of depositors. Government could adopt some measures to reduce the negative feelings from the commercial banks.

5.       In the eyes of Ministry of Finance and Bank of Japan, postal savings could be seen as an

unwelcome outsider because the Ministry' s authority over the postal savings is limited, believing that  a move in fiscal or monetary policy can be worked in full scope if all the money is under the control of Ministry of Finance. Although a close cooperation between Ministry of Finance and Ministry of Post and Telecommunication has been in progress, the relation between them must be kept close for further financial reform in the coming future.

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