Changes in Household Portfolio Management Behavior in an Aging Society, and the Implications
January 7 (Monday) 2008
Shuntaro Namba
Executive Fellow
Summary
- The “baby boomers” are approaching retirement, and Japan has become a full-fledged aging society. According to the “Households Projections for Japan (The National Projections)” produced by the “National Institute of Population and Social Security Research”, the percentage of 60 or above households (age of the head of the household) among total households increased from 33.0% in 2000 to 37.2% in 2006, and is predicted to reach 45.6% by 2025. Twenty years from now about half of Japanese households will be 60 or older, pushing Japan’s aging society into a class of its own.
Impact of an Aging Society on the Selection of Financial Assets
According to the Ministry of Internal Affairs and Communications’ “Family Income and Expenditure Survey”, 60 or above households command 30% of Japan’s entire financial assets, and in recent years the percentage held by 70 or above households has rapidly increased. The percentage held by 60 or above households reached 58.5% in 2006, marking a 4.3% increase over five years. It is not exaggeration to say that the portfolio management behavior of the elderly will dictate the movement of Japan’s entire financial assets in the future.
Based on the “Public Opinion Survey on Household Financial Assets and Liabilities” conducted annually by the “Central Council for Financial Services Information”, the assets held per Japanese household broken down by age show that assets increase in households from the 20s to 50s age bracket and peak after reaching retirement in the 60s (JPY 21.57 million in 2006). This high level is maintained into the 70s age bracket. Moreover, in contrast with US households, regardless of age the holding ratio of savings and trusts are extremely high while the ratios for stocks and mutual funds are low.
With stocks and mutual funds defined as risk assets and savings and trusts defined as safe assets, a look at the transition of the household assets holding ratio by age shows that the risk assets ratio of 60 and above households is rapidly increasing, while the ratio of safe assets, which has traditionally increased along with age starting from the 40s age bracket, is leveling off.
Dividing the impact of an aging of society into two categories (1. the impact of the increasing number of elderly households, and 2. the change in the assets holding ratio by elderly households), and then estimating the holding ratio for risk and safe assets of all households shows that, on its own, the impact of the increasing number of households is marginal. However, adding the effect of a change in the assets holding ratio by age, which reflects the recent trend, the holding ratio of risk assets among all households is predicted to rise dramatically along with a precipitous drop in the holding ratio of safe assets because of the tendency among elderly households to prefer risk assets and avoid safe ones.
Impact on the Asset Cycle Structure and its Implications
The aging of society along with changes in the portfolio management behavior of primarily elderly households will have a significant impact on the future state of financial institutions through a change in the flow of funds structure. Estimating the financial assets composition of all households based on future estimates of the household holding ratio of risk and safe assets reveals a possibility that the weight of savings and trusts will significantly decrease (47.7% in 2006 to 42.0 – 33.5% in 2025) while the weight of stocks and mutual funds will significantly increase (16.7% in 2006 to 26.8 – 38.2% in 2025).
The outstanding loans of Japanese financial institutions have substantially decreased since 1990 as they have adjusted the balance sheets of companies facing the bursting of the economic bubble, and have dealt with their own bad loans as well. Because of households moving away from savings, financial institutions’ debt accounts, comprised of savings deposits and trusts, have also been in a trend of serious stagnation since the turn of the century. There is a strong possibility that the aging of society, through changes in household preferences for risk and safe assets, will greatly reinforce such trends and have an extremely serious impact on both the assets and debts of financial institutions, in particular ones that that handle savings such as banks, postal savings, and trusts. According to estimates, a direct result will be a substantial decrease in savings deposits and trusts, which are the outstanding debt accounts of financial institutions that handle savings (annual average decrease of JPPY 4.5 – 11.2 trillion from fiscal 2007 to fiscal 2025). An indirect result will be a decrease in company loans from the change in the weight of asset procurement by companies, which reflects the increase of household holdings of stocks and mutual funds (average annual decrease of JPY 1.3 – 2.8 billion from fiscal 2007 to fiscal 2025).
If it is unavoidable that traditional financial intermediary functions centered on savings and loans will only continue the shrink in the future, financial institutions (primarily banks) will have to drastically change their old business models and strive to realize new financial functions. First, it is necessary to quickly construct market-oriented indirect financial models that respond to risk management by pursuing a transition from traditional risk-intensive face-to-face financial business, such as savings and loans, to risk-dispersed marked-oriented financial business, such as mutual funds and structured-financing instruments. Second, it is necessary to develop not only the traditional one-way financial intermediation specializing in the assets side of households and the debt side of companies, but also financial services targeting both the assets and debts of households and companies. Specifically, it will become important to expand services that focus on: 1. the debt side of households such as home equity loans and reverse mortgages, and 2. the assets side of companies such as cash management services and the securitization of inventory and accounts receivable.
Even more so than in the past, the aging of Japanese society, through a shift from safe assets to risk assets in the household sector, is forcing financial institutions to break away from traditional financial intermediary functions and realize new financial functions.
