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Thought Leadership

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

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 compared to those before the global financial crisis.

It may seem logical to assume that low returns on cash savings would prompt retail investors to move away from cash and into higher risk assets that potentially offer a higher return. To explore this assumption, we look at the example of Japan which has experienced a low interest rate environment for 20 years.

We find some evidence to suggest that in this low interest rate environment, Japanese households have taken on more risk - particularly by gaining more exposure to foreign assets – in the currency, equity and bond space.

However, additional risk taking is fairly insignificant in the wider context of a very conservative asset allocation. Japanese retail investors keep far more of their assets in cash than is the case in other developed markets.

Chart showing percentage of assets held in cash by region

Digging deeper into the environment of the Japanese retail investor, we find the dismal excess return of equities, risk aversion and a persistent deflationary mindset can help explain why this was the case.

These factors, including risk aversion, are somewhat unique to Japan when making comparisons with other developed markets such as the US, UK and eurozone. Out of these markets, the eurozone is most like Japan in terms of its asset return profile and demographics.

We find that the “demographic effect” - where investors become more conservative with age - does not seem to be a feature of the Japanese retail investor. Indeed, households aged 60 years and above hold the highest share of risk assets. This is perhaps less surprising when one considers how life expectancy has risen.

Please see below for the full paper