In focus - Thought Leadership

Savings behaviour in a low rate environment: what can we learn from Japan?

We examine whether Japanese households have taken on more risk in search of higher returns, and consider the implications for other developed markets.


Piya Sachdeva

Piya Sachdeva


Keith Wade

Keith Wade

Chief Economist & Strategist

One of our inescapable truths is that risk-free interest rates in the next ten years will be higher than the exceptionally low levels of today, but are still likely to be relatively low by the standards of pre-global financial crisis levels.

Given that we see interest rates remaining low even after monetary policy normalisation, we ask whether low returns on cash could result in households taking on more risk to seek higher returns. The importance of this shift in household portfolio allocation is threefold. Firstly, this provides insight into future retail investment trends and specifically the future demand for risky and conservative investment vehicles. Secondly, the willingness of households to take on more risk is significant for the real economy as a key channel for the monetary policy transmission mechanism. Thirdly, this aids the understanding of retail investor flows, which can play a part in driving market prices.

Turning to an economy where rates have been exceptionally low for many years, we draw on the experience of Japan for an insight into the behaviour of savers. We examine the lessons learned from the Japanese with a view to understanding to what extent the behaviour will be replicated in other developed markets, such as the US, eurozone and UK.

The Japanese experience of low rates

Chart 1: The interest rate reached zero in 1999

Source: Thomson Reuters Datastream, Schroders Economics Group, 28 January 2019

Japan has had extremely low interest rates for over two decades. Following the bursting of the Japanese asset price bubble in 1989, the Japanese economy suffered a sharp slowdown. In the late 1990s, inflation fell into negative territory. The Bank of Japan (BoJ) responded by cutting interest rates aggressively to support growth and inflation. But as a result of prolonged deflation, the central bank eventually introduced zero interest rate policy in 1999 and, in 2016, cut the base rate to -0.1%, where it stands today (chart 1).

Household portfolio shifts

Have low interest rates caused Japanese households to search for higher yielding assets and take on more risk?

The change in composition of household financial assets since the introduction of zero rates shows some additional risk taking (chart 2). As a share of total financial assets, households have reduced their holdings of cash and debt and increased the proportion of more risky assets such as equities and investment trusts. Although the holdings of equities continued to rise after 2016, there is limited evidence to suggest the introduction of negative interest rates caused an additional wave of household risk taking as the shares of cash and bonds were fairly stable.

Chart 2: Japanese households have taken on more risk since zero rates

Source: Bank of Japan Flow of Funds, Schroders Economics Group, 28 January 2019


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