Does Japan Save Too Much? Or Do Other Major Countries Save Too Little? International comparison of savings rates from the modified golden rule approach

The purpose of this paper is to examine whether Japan's savings (investment) rate is higher than the optimal level in the neoclassical framework and if so why. Our first finding is that Japan saves optimally when the rate of time preference is assumed to be zero while it over-saves when the real interest rate is used to approximate the rate of time preference. Meanwhile, major Western countries except Germany save close to the optimal level when the real interest rate is assumed to be the rate of time preference while they under-save when the time preference is set to be zero. We also calculate the implicit rate of time preference, assuming that the actual saving rate is equal to the optimal level and found that Japan and Germany have a low and stable time preference throughout the period while the other major countries show a rapid rise in the rate of time preference after the late 1970's. Regarding European countries except Germany, we make a case that the household sector, which is supposed to have a higher time preference than the other sectors, became more sensitive to the capital returns gained by the corporate sector since the end of the 1970s when capital's share of income had started to rise. This increasing sensitivity of the household sector to capital returns led to contain corporate sector capital expenditure and to stimulate instead household consumption. Based on these analyses, we conclude that Japan's savings are not too high for the purpose of maximizing long-term economic growth. The low and stable rate of time preference may reflect the fact that the Japanese corporate sector has not been exposed to stricter corporate governance or more intense pressures from institutional investors. As a result, the corporate sector has been able to make investment decisions based on its own time preference. These factors for the low and stable time preference in Japan, however, have started to fade out gradually as Japanese capital markets go through the same experience seen in Europe during the 1980s. This implies that Japan's savings rate is likely to decline, and, consequently, the investment-savings gap ratio over GDP may start to diminish in the near future.