Understanding the decline in Japan's saving rate in the new millennium

The decline in Japan's household saving rate accelerated sharply after the domestic banking crisis in 1997/98, but then decelerated again from around 2004/05. Such nonlinear movement in the saving rate cannot be explained by the monotonic trend of population aging alone. First, we statistically confirm the existence of such nonlinearity in aggregate data. Second, extending the life-cycle and the permanent income hypothesis (LCPIH), we exhibit that a significant decline in household income growth in the late 1990s and early 2000s plays a major role in creating the sharp saving rate decline in the same period. Third, using income and consumption data from the Family Income and Expenditure Survey, it is shown that different saving rate variations of different age groups, responding to heterogeneous income shocks, have contributed to generating the recent aggregate saving rate fluctuations. In particular, the income slow down in early 2000s of older working households provide a major contribution to aggregate saving rate decline.