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Impact of Small Personal Savings on Local Economies

Hikaru Tanaka/Associate Professor, Faculty of Economics, Chuo University
Area of Specialization: Economic History

Japanese government is recently promoting private individuals' investment behavior, as represented by the NISA system launched in 2014, instead of saving behavior. However, as long as such behavior is undertaken by ordinary Japanese citizens who are not billionaires such as Bill Gates and Elon Musk, it will not have a significant impact on financial markets or corporate control whether they makes saving deposits or investing in stocks. But yet, the current Japanese government tries to make domestic individual investment more active. On the contrast, from the Meiji Period to the Showa Period after World War II, the same Japanese government had always expected increase of domestic individual savings. Why did the government support such a monetary policy, what was the economic background for the policy despite small-scale of individual savings in micro view?

To get straight to the point, understanding the economic impact of small individual savings in Japan helps to understand Japanese industrialization process and its high economic development era. To understand this issue, you should note that any deposits in any financial institutions and any investments such as stocks or securities are both "household savings" in macro-economic view.

Japan's modernization and its feature: Small individual savings as a source of domestic investment

Modernization and economic development process in Japan began roughly at the end of the 19th century after the end of the Edo Period, during which the country had been governed based on a policy of national isolation. The success of modernization (in other words, the industrial revolution) in Japan was almost the first achievement in the non-Western world at the time. As the process, the foundation for Japanese manufacturing was built in the early 20th century, and it led Japanese high economic development after the WWII. One of the features of Japanese modern success was that it didn't try to induce foreign investment, which is greatly different from the success of industrialization in Asian countries after WWII. In other words, Japan at that time used almost exclusively domestic capital to cover the funds necessary for huge domestic investment.

However, the Japanese government at the time did not have much money to invest. Moreover, Japanese private companies emerging as main players in various industries were the one who in need of funds. So, what was the source of that money? In fact, the source was the domestic household savings, which saving rate was high enough that had almost always remained around 10% of GDP since the early 20th century. The majority of these savings were deposits in various financial institutions, instead of securities or stocks such as personal investments by the wealthy class. In short, the main source of Japanese modernization capital was the accumulation of small savings by the common individualーthat is, by the masses.

The funds accumulated through mass deposits contributed to the development of the Japanese economy through the investment activities of the financial institutions to which they were deposited. In modern Japan, the mechanism of fund accumulation through small individual savings led to the development of regional economies; not only of some large cities, but also of provincial cities and farming villages. Rather than being vacuumed up by large cities and large firms, investment funds from small savings were circulated developmentally within regional economies that included many SMEs.

Accumulation of popular funds and local communities

Why did the increase of savings in modern Japan lead to the development of regional economies? To answer this question, it is necessary to focus on the accumulation process of small individual savings in Japan.

The accumulation of small individual savings by ordinary people in Japan began with the spread of postal savings. Postal savings bank was established in 1874 as a savings institution for the commoner and became popular throughout the Japan in the 20th century as education on savings such as stamp savings and contract savings was conducted in elementary schools and in local communities. The concept of savings was brought into everyday life through women's associations and school classes.

As a result, the propensity of saving among Japanese people rose. As mentioned above, the household savings rate of about 10% of GDP became constant in Japan. Many such savings were deposited in postal savings or in non-profit financial institutions such as present-day Japan Agricultural Cooperatives (JA), credit unions, and shinkin banks (cooperative regional financial institutions). This is because, unlike today, people needed to have a certain extent of assets or status to open a bank account, which made the common people hard to use banks.

The industrial cooperative system that was enacted in 1900 laid the institutional foundation for the predecessors of the current Japan Agricultural Cooperatives and credit unions throughout Japan. An industrial cooperative is a cooperative union system. A cooperative union is a non-profit business organization that secures business funds through the investment of volunteers. Similar to the joint-stock company system, a cooperative union is a business entity that collects funds from many volunteers; however, the characteristic of cooperatives union is that they are non-profit organizations that pursue the common interests of all members rather than pursuing profits as an organization.

In modern Japan, among these non-profit cooperatives, credit unions spread throughout the country in less than 20 years from the establishment of the system to the period between the two world wars. Credit unions are financial institutions that provide microcredit to their members. They were established at the level of small villages with no particular industry other than agriculture. Sometimes, they were established as a youth movement in the village centered on elementary school alumni associations and youth associations. Credit unions grew among local communities as a financial institution that provided temporary funds for people to raise silkworms and produce local specialties, and as a place to deposit savings earned from such activities. Individual savings in the region became investments as micro-loans for another party. As a result, local industry grew, and the funds obtained from that industry were once again used as savings to form investment funds in the region. In this way, a cycle of funds was formed.

On the other hand, the funds accumulated through postal savings was managed by Ministry of Finance. In case of managing those funds, the Ministry was simultaneously conscious of prudent action to avoid using up the small savings of commoners, and, from 1909 onwards, of giving back to the local economy. Japanese government at the time recognized the importance of returning funds collected from the local people to the local areas, so they tried not to absorb those funds to central.

Funds from The Deposit Bureau of the Ministry of Finance, mainly funded by postal savings, were used as reconstruction funds for disasters such as the Great Kanto Earthquake of 1923, a large-scale frost damage in rural areas during the financial crisis of 1927 and so on. In order of the early Keynesian fiscal policies of Takahashi Korekiyo, the Minister of Finance, the funds were also used for measures against unemployment and rural poverty following the Great Depression in the 1930s. In large cities, the funds were used not only as relief funds in the event of a disaster, but also as funds for preparing public assets in each region, such as the construction of central wholesale markets.

In modern Japan, although outflow of rural population to urban areas existed constantly, the population of rural areas was maintained. That's because rural area also experienced economic development. Not only industrial production, but agricultural production also increased, and the growth directly contributed not only to self-sufficiency in food, but also to domestic industry in the form of raw material supply. This means that the characteristics of modernization and industrialization in early modern Japan differed from the situation in developing countries in recent years; that is, the trend in which industrialization often leads to overconcentration in large cities such as the capital. The different conditions in Japan were achieved through the development of local financial networks and public assets that support local economies.

Popular funds as an alternative financial system

In modern Japan, when people think of the financial system, they usually envision the so-called megabanks and the stock market. In Japan's economic history, there was the so-called multi-layered financial structure in which the private financial market consisted of a pyramid-shaped bank network and stock market. At the top of the pyramid was the Bank of Japan, followed by large banks such as zaibatsu banks (financial cliques). Under that umbrella were ordinary banks that were equivalent to current regional banks and trading companies. This structure had been recognized as the general financial system in early modern Japan.

However, early modern Japan had another financial structure that could be described as alternative financial system apart from the financing network of large banks and large firms. It was this network of mass funds, which consisted of postal savings and people's small savings in industrial cooperatives, which grew in close contact with the local community and with no relationship with big capital.

The accumulation of a large amount of funds in the Japanese economy in the form of small individual savings in a network different from the general financial market, contributed to the development of public goods for regional economies in modern Japan and to the creation of a financial safety net that supports daily life. The small amount of savings that individuals accumulated for their daily lives from a microeconomic view became a huge amount of capital from a macroeconomic view, thereby supporting the stability of the whole Japanese economy and society.

In recent years, the Japanese government's efforts to shift from personal savings to personal investment will dismantle this another financial system as a social safety net, and will once again inject all of Japan's domestic savings into the private financial market. Now is the time to pay close attention to whereabouts the popular funds are heading and its function, which have functioned as a complementary financial system that differs from the private financial market in nature.

[Reference Literature]

Hikaru Tanaka, Another Financial System: Modern Japan and Microcredit, the University of Nagoya Press, December 2018.

Hikaru Tanaka, Japanese Savings Tradition is Actually Not Very Old: The Customs Built Through Education and Systems, Toyo Keizai Online, November 9, 2023.

Hikaru Tanaka/Associate Professor, Faculty of Economics, Chuo University
Area of Specialization: Economic History

Hikaru Tanaka completed the Doctoral Program in the Graduate School of Economics, The University of Tokyo in 2013 (holds a PhD in economics). She served as a Specially-appointed Assistant Professor in the Graduate School of Economics, The University of Tokyo from 2013 to 2014 and as a full-time lecturer (Japanese economic theory) in the Graduate School of Economics, Kobe University from 2014 to 2019. She assumed her position of Associate Professor (economic history) in the Faculty of Economics, Chuo University in 2019.