What is the effect of the decline in the domestic
savings rate on the growth rate of the economy of
Japan (1970 – 2012)?
Bachelor thesis
Author: Robin de Blieck Student number: 10282939
University: University of Amsterdam
Faculty: Faculty of Economics and Business Supervisor: Ieva Rozentale
Table of contents
Chapter 1: Introduction 3
Chapter 2: Literature review 5
2.1 Relationship between domestic savings and economic growth
according to economic theory. 5
2.2 The Solow model – theoretical and empirical explanation. 7
Chapter 3: Methodology 10
3.1 Research setting. 10
3.2 Data and methods. 12
Chapter 4: Analysis 14
4.1 Relationship between gross domestic savings (% of GDP),
domestic investment (% of GDP), GDP growth (% annual) and foreign
direct investment, net inflows (% of GDP). 14
4.2 Statistical test for relationship between gross domestic savings (%
of GDP) and GDP growth (% annual). 19
4.3 Statistical test for positive relationship between gross domestic savings (% of GDP), domestic investment (% of GDP) and GDP
growth (% annual). 21
4.4 Statistical test for positive relationship between gross domestic savings (% of GDP), domestic investment (% of GDP) and GDP growth (% annual) by including foreign direct investment, net inflows
(% of GDP). 23
4.5 Comparing the statistical tests. 24
Chapter 5: Conclusion 25
Chapter 6: References Chapter 7: Appendices
Chapter 1: Introduction
The Japanese gross domestic savings (% of GDP) have declined from 40% in 1970 to 18,6% in 2012 (see figure 5). The decline in the gross domestic savings (% of GDP) has consequences for domestic investment. Domestic investment has to be financed from domestic savings or foreign savings (Rodrik, 2000, p. 481). A decline in the gross domestic savings (% of GDP) has negative effects on domestic
investment if the inflows of foreign savings are unchanged. This decline in domestic investment has negative influences on the growth rate of the economy. This is in line with the predictions of the Solow model. According to the Solow model a low
domestic savings rate causes low economic growth and high domestic savings rate leads to high economic growth (Alguacil, Caudros & Orts, 2004, p. 281).
The relationship between the domestic savings rate, domestic investment and growth rate seems to be relevant, because empirical evidence exists of a relationship between them. According to the evidence of Rodrik (2000) 31 countries had average annual per capita GDP growth rates of 2.5 percent or higher. In these successful countries the median savings rate was 24 percent (Rodrik, 2000, p. 481).
Furthermore, the author described in his paper that 59 countries had average annual per capita GDP growth rates of less than 1 percent. In these poor performing
countries the median savings rate stood at 16 percent (Rodrik 2000, 481).
Japan’s high domestic savings rate in the post-war period has provided the funds for high economic growth (Campell, 2004, p. 797). However more recently Japan had experienced a sharp decline domestic savings. The decline can be split up in two periods. The decline in the first period (1970 – 1980) is caused by low net government savings and by low net savings of corporations (see figure 3 and 4). The decline in the second period (1980 – 2012) are caused by a decline in net household savings and the dissaving of the government (see figure 2 and 4). This provides an interesting case for empirical investigation.
This bachelor thesis therefore investigates the following research question: What is the effect of the decline in the domestic savings rate on the growth rate of the economy of Japan? The aim of this thesis is to search for an empirical linkage
between domestic savings and economic growth. It does not investigate a causal relationship between domestic savings and economic growth. This is done by first looking at the relationship between gross domestic savings (% of GDP) and GDP growth (% annual); and secondly by looking at the relationship between gross
domestic savings (% of GDP), domestic investment (% of GDP) and GDP growth (% annual). By doing so, this research provides evidence about the effect of the
domestic savings rate on the growth rate of the economy in Japan. This information is useful, because it provides the central Bank of Japan with a way to stimulate or depress economic growth. For example, by influencing the willingness to save.
The research question is answered by comparing data of the gross domestic savings (% of GDP), investment (% of GDP) and annual growth of GDP available at Datastream and by calculating correlations between them. There are also statistical
tests to test the relationship between gross domestic savings (% of GDP), investment (% of GDP) and annual growth of GDP and the direction of the relationship between them.
Furthermore, based on existent empirical evidence (Alguacil, Caudros & Orts, 2004, p. 281), the role of foreign savings in the domestic savings, investment and growth relationship is investigated. It was included in the research, because foreign direct investment is a relevant component of foreign savings.
The structure of the thesis is as follows. The first section of Chapter 2 contains a literature review of the general economic theory for the relationship between
domestic savings and economic growth. The second section discusses the predictions of the Solow model in the domestic savings and economic growth relationship. In the first section of Chapter 3 the case of Japan is introduced. The second section contains the methodology approach and why this methodology is used to study the relationship between domestic savings and economic growth. The first section of Chapter 4 looks at the relationship between gross domestic saving (% of GDP), domestic investment (% of GDP), annual growth of GDP and foreign direct investment (% of GDP). The second section tests the relationship between gross domestic savings and annual growth of GDP. The third section statistically tests the relationship between gross domestic savings (% of GDP), domestic investment (% of GDP) and annual growth of GDP. The forth section tests the relationship between gross domestic savings (% of GDP), domestic investment (% of GDP) and GDP growth (% annual) with the addition of foreign direct investment (% of GDP). Section five compares the results obtained from the statistical test in section four and five. Chapter 5 gives a conclusion of the domestic savings and economic growth relationship in the case of Japan.
Chapter 2: Literature review
2.1 Relationship between domestic savings and economic growth according to economic theory.
The relationship between domestic savings and economic growth can be explained by the connection between the domestic savings, investment and economic growth rate. If for example the domestic savings rate is high, more money is available for domestic investment. High domestic investment causes higher capital accumulation. High capital accumulation causes higher economic growth (Rodrik, 2000).
There are however different views about the relationship between domestic savings and economic growth. According to the theory of Lewis changes in the saving rate are the driving force for economic growth. This is in conjunction with the empirical finding that countries in the post-war period have had a sharp increase in their saving rate (Rodrik, 2000). According to Bernanke and Gürkaynak (2002) the saving rate is highly correlated with long-run economic growth (Bernanke &
Gürkaynak, 2002, p. 53), implying that the predictions of the Solow model are correct. Thus, that a low domestic saving rate causes low economic growth and a high
domestic savings rate causes high economic growth (Campell, 2004, p. 797). On the contrary, according to the article of Rodrik (2000) changes in the saving rate have only a temporarily effect on economic growth. Even when the change in the saving rate is permanent (Rodrik, 2000, p. 490). This is in contrast with changes in the growth level. These changes have permanent effects on the saving rate (Rodrik, 2000, p. 483). The saving rate has thus no effect on long-term economic growth. According to this theory the saving rate tends to be the outcome of economic growth. The saving rate should therefore not be used to stimulate
economic growth and it is therefore not a useful instrument policy (Rodrik, 2000, p. 505).
However, in the case study of Mexico a positive relationship between domestic savings and economic growth exists by including foreign direct investment (Alguacil, Caudros & Orts , 2004, p. 282). This can be explained as follows. Domestic saving and domestic investment do not have to be equal in an open economy. Domestic investment can be larger than domestic savings, because a country can borrow the difference from other countries (Alguacil, Caudros & Orts, 2004, p. 283). This can be explained according to the following equation:
I = S - CA
I = Domestic investment S= Domestic savings CA = Export - Import
A country that invests more than it saves must have a current account deficit to obtain equilibrium in the equation (Alguacil, Caudros & Orts, 2004, p. 283). A current account deficit means that there is inflow of capital from foreign countries (Alguacil,
Caudros & Orts, 2004, p. 283). It is therefore possible that domestic savings and foreign savings can supplement domestic investment. Foreign direct investment is an important part of foreign savings and it should therefore be included in the
relationship between domestic saving, domestic investment and economic growth. It is also possible that a country saves more than it invests. In that case it would have a current account surplus, which means that capital is exported to foreign countries.
National savings in an economy can be expressed as follows (Mankiw, 2010, p. 67):
National savings = Y – C – G Y = GDP
C = Consumption
G = Government purchases
The national savings of an economy can be split up in two parts. One part are the savings of the private sector and the other part are the savings of the public sector (Mankiw, 2010, p. 67).
Savings of the private sector are (Mankiw, 2010, p. 67): Savings private sector = Y – T – C
Y = GDP T = Taxes
C = Consumption
The savings of the public sector are (Mankiw, 2010, p. 67): Savings public sector = T – G
T = Taxes
G = Government purchases
2.2 The Solow model – theoretical and empirical explanation.
This section looks at the predictions of the Solow model, neoclassical growth model, for the relationship between domestic savings and economic growth in an open economy. The standard Solow model is that of a closed economy. The extension of the Solow model to an open economy is important, because nowadays there are very few countries with closed economies. The main cause of growth in the Solow model is capital accumulation. The saving rate affects capital accumulation and the change in capital influences economic growth.
According to the circular flows identity in an open economy (Grätner, 2009, p. 273): I + (EX - IM) = S + (T – G)
I = Domestic investment
(EX – IM) = Investment abroad S = Private savings
(T – G) = Public savings This means that:
I = S + (T - G) - (EX - IM) Assumptions:
1) Individuals save a constant fraction of disposable income (Grätner, 2009, p. 273). S = s( Y - T) were s = 1 – c
Y = Real output T = Taxes
s = marginal propensity to save c = marginal propensity to consume This implies that:
I = sY + (1 - s)T - G - (EX - IM)
2) Government spending is composed of government consumption and government investment (Grätner, 2009, p. 275).
G = Gi + Gc
Gi = government investment Gc = government consumption
I + Gi = sY + (1 – s)T – Gc – (EX – IM) Gi = aG
Gc = (1 – a)G
a = fraction of government investment that is invested In the Solow model (Grätner, 2009, p. 275):
∆K = I + Gi - ∂K
∆K = net changes in stock of capital I = Domestic investment
∂ = depreciation of capital at a constant rate K = Capital
Thus,
∆K = sY + (1 – s)T – (1 – a)Gc – (EX – IM) - ∂K Because Y= F(K,L0) = AKaL01-a
Y = Real output
A = Production technology K = Capital
L0 = Fixed labour input
∆K = sF(K,L0) + (1 – s)T – (1 – a)Gc – (EX – IM) - ∂K
In this formula it can be assumed that Y>T. If this condition holds an increase in the saving rate s shifts the savings curve upward. If the savings curve shifts upward it intersects the requirement line at a higher level of capital and output. A numerical example is here below.
Numerical example
The Solow growth model for an open economy according to the following values of the parameters: Parameter Value L0 10 T 4 a 0,5 Gc 2 Ex 5 Im 4 ∂ 0,5 8
According to this predictions an increase in the saving rate from 0,4 to 0,6 shifts the savings function upward. It intersects the requirement line (0,5*k) at a higher value. The output in the economy increases from 8,94 to 11,40 billion due to the increase in the saving rate.
Figure 1: Solow growth model open economy
Chapter 3: Methodology 3.1 Research setting.
As already mentioned in the introduction, Japan provides an interesting case for an empirical investigation of the relationship between domestic savings rate and the growth rate, because Japan had experienced a sharp decline in the domestic savings rate in the period from 1970 to 2012. If the savings rate had remained stable it would not be possible to study the effect of the savings rate on the growth rate, because the change in the growth rate is then the result of the change in other factors. Besides, the amount of research for the relationship between the domestic savings rate and economic growth is limited for the case of Japan.
To study the decline in the gross domestic savings (% of GDP), it has to be split up in private savings and public savings. Private savings are equal to the sum of net household savings and the net savings of corporations. The net household
savings had increased from 1970 to 1990. Thereafter came a sharp decline to 2008. From 2008 to 2012 there was a small increase in value of net household savings.
A main cause of the decline in the net household savings is the dissaving of the aged in Japan (Koga, 2006, p. 312). In 1980 9.1% of the Japanese population was aged 65 and above, and this percentage increased to 19.9% in 2005 (Braun, Ikeda & Joines, 2009, p. 291). The decrease of the household savings can be
explained with the life-cycle hypothesis model of Franco Modigliani. According to the article of Horiako (2010) the life-cycle hypothesis model is highly applicable to Japan. According this model people save during their working life and spend their money after retirement (Mankiw, 2010, p. 510). When people stop working they expect a large drop in income. However, they do not want a large drop in their standard of living, as measured by consumption (Mankiw, 2010, p. 510). To keep the level of consumption constant, they have to save during their working live (Mankiw, 2010, p. 510).
Figure 2: Net household saving
The net savings of corporations had been low between 1980 and 1994. After 1994 there was a large increase to 45.000 (billion JPY). Thereafter it had fluctuated around 40.000 (billion JPY).
Figure 3: Net savings corporations
The net government savings had been very low between 1970 and 1986. After 1986 there was a sharp increase in savings. From 1990 to 2008 there was a sharp decline in net government savings. From 1997 the net government savings even became negative.
Figure 4: Net government savings
Thus, the decline in gross domestic savings (% of GDP)1 in the period from 1970 to 1980 can be attributed to the fact net government savings and net savings of
corporations were low during this period. Between 1980 and 1990 net government savings increased. This could have caused some upward movement in gross domestic savings (% of GDP). From 1990 to 2012 the net government savings and the net household savings had decreased sharply. This had caused a decline in gross domestic savings (% of GDP) that could not be compensated by an increase in net savings of corporations.
3.2 Data and methods.
In order to investigate the effect of the decline in the domestic savings rate on the growth rate of the economy of Japan (1970 – 2012), I first look at the relationship between the gross domestic savings (% of GDP), domestic investment (% of GDP) and GDP growth (% annual). The graphs of gross domestic savings (% of GDP), domestic investment (% of GDP) and GDP growth (% annual) are compared to each other to find general trends. I also took into account the influence of foreign direct investment (% of GDP) on domestic investment (% of GDP). I did this research by consulting graphs and data that are available at Datastream.
Furthermore, correlations are calculated in Stata with use of the data from Datastream between the following variables:
• gross domestic savings (% of GDP) and GDP growth (% annual); • gross domestic savings (% of GDP) and investment (% of GDP); • domestic investment (% of GDP) and GDP growth (% annual); and
• foreign direct investment, net inflows (% of GDP) and domestic investment (% of GDP).
Thereafter, there are statistical tests to test the effect of the decline in gross domestic savings (% of GDP) on the growth of GDP in Japan. The tests are conducted by using ordinary least squares for the time period between 1980 and 2012. This time period is chosen, because all the data from year to year are available for this time period. The statistical test were conducted at a 5% significance level and
at 31 degrees of freedom. The tests were conducted according to the following steps:
1. Hypotheses.
2. Test statistic and its distribution. Test statistic = (y1 – 0)/(SE(y1)) 3. Rejection region.
4. Observed test statistic 5. Confrontation
6. Conclusion
1 See figure 5 for graph of gross domestic savings (% of GDP)
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The results of these steps are presented in the sections 4.2, 4.3 and 4.4.First, there is a statistical test to test if there exist a relationship between gross domestic savings (% of GDP) and GDP growth (% annual). The population function of this test is as follows:
GDP growth (% annual) = B0 + B1* gross domestic savings (% of GDP) + u.
The inverse relationship is tested as follows:
Gross domestic savings (% of GDP) =Y0 + Y1*GDP growth (% annual) + u.
In this statistical test is tested if the factor B1 has a significant effect on GDP growth (% annual) and if the factor Y1 has an effect on gross domestic savings (% of GDP).
Besides that the relationship between gross domestic savings (% of GDP) and domestic investment (% of GDP) is tested and the relationship between domestic investment (% of GDP) and GDP growth (% annual). The population functions are as follows:
Domestic investment (% of GDP) = B0 + B1*gross domestic savings (% of GDP) + u. GDP growth (% annual) = Y0 + Y1*domestic investment (% of GDP) + u.
In this statistical test is tested if the factor B1 has a positive effect on domestic investment (% of GDP) and if Y1 has a positive effect on GDP growth (% annual).
Besides, there are statistical test to test if the relationship between gross domestic savings (% of GDP), domestic investment (% of GDP) and GDP growth (% annual) changes by including foreign direct investment, net inflows (% of GDP). This is statistically tested as follows:
Domestic investment (% of GDP) = B0 + B1*gross domestic savings (% of GDP) + B2*foreign direct investment (% of GDP) + u.
GDP growth (% annual) = Y0 + Y1*gross domestic savings (% of GDP) + Y2*foreign direct investment (% of GDP) + u.
The factors B1 and B2 are statistically tested to see if these factors have a positive effect on domestic investment (% of GDP). The factors Y1 and Y2 are also tested to test if these factors have a positive effect on GDP growth (% annual).
Chapter 4: Analysis
4.1 Relationship between gross domestic savings (% of GDP), domestic
investment (% of GDP), GDP growth (% annual) and foreign direct investment, net inflows (% of GDP).
The graph of the gross domestic savings (% of GDP) shows that there were three general phases in gross domestic savings (% of GDP) in the period (1970 – 2012). In the first phase gross domestic savings (% of GDP) had declined from about 40% to 29% in 1983. Thereafter, there was a prolonged increase in the gross domestic savings (% of GDP) from 1983 to 1991. Since 1991 the gross domestic savings (% of GDP) had declined from about 33% to 18% in 2012. Thus, the general trend is that the gross domestic savings (% of GDP) had declined.
Figure 5: Gross domestic savings (% of GDP)
The domestic investment (% of GDP) had four general phases. First, the domestic investment (% of GDP) declined from about 32% to 28% in 1984. Thereafter, the domestic investment (% of GDP) fluctuated around the 28% in the period 1985-1987. From 1987 to 1990 the domestic investment (% of GDP) had increased in value from about 28% to 32%. After all, a sharp decline until 2010. After 2010 the investment (% of GDP) had showed a small increase. Thus, the domestic investment (% of GDP) had showed a general declining trend in the period from 1980 to 2013.
Figure 6: Investment (% of GDP)
There a three general phases in the graph of GDP growth (% annual). It had fluctuated around the 10% from 1961 to 1969. Thereafter, GDP growth (% annual) was around 5% from 1970 until 1990. From about 1950 until 2010 it had fluctuated around the 0%. Thus, GDP growth (% annual) had showed a declining trend since 1960 with ups and downs.
Figure 7: GDP growth (% annual)
From a look at the graphs there seems to be a relationship between gross domestic savings (% of GDP) and the domestic investments (% of GDP). Both showed an overall declining trend. However, there seems to be no clear cut relationship between domestic investment (% of GDP) and the GDP growth (% annual). The GDP growth (% annual) had showed a declining trend, but it had been very volatile and it had showed no clear cut relationship like gross domestic savings (% of GDP) and domestic investment (% of GDP).
With the use of the data in appendix 3 the correlations between gross
domestic savings (% of GDP), domestic investment (% of GDP) and GDP growth (% annual) are calculated in Stata (see Appendix 4). Not all the correlations between them are relevant, thus the focus is on the most important ones. Important is the correlation between gross domestic savings (% of GDP) and GDP growth (%
annual). The correlation is 0,56 (see appendix 4). This means that there may exist a strong linkage between them. The correlation is positive. This means that the decline of the gross domestic savings (% of GDP) probably has a negative effect on GDP growth (% annual).
The correlation between gross domestic savings (% of GDP) and domestic investment (% of GDP) is also relevant, because there can be an effect of domestic savings on domestic investment according to general economic theory
The correlation between domestic investment (% of GDP) and gross domestic savings (% of GDP) is 0.96 (see appendix 4). This correlation is positive and it is near the value 1. This implies that gross domestic savings (% of GDP) has a strong
positive effect domestic investment (% of GDP).
The high correlation between gross domestic savings and domestic
investment is in conjunction with the Feldstein-Horiaka puzzle2 (Grätner, 2009, p. 281). According to this puzzle the gross domestic savings rate and domestic
investment are highly correlated, very much like in a closed economy. This finding is line with the predictions of the Solow model, however not with the intensity the model suggest (Grätner, 2009, p. 281). It’s a puzzle, because according to the economic theory open economies with perfectly free capital flows should have investment rates independent of national savings rates (Grätner, 2009, p. 281). Besides that the investment rates of all the countries should be the same (Grätner, 2009, p. 281). In closed economies investment and savings are identical (Grätner, 2009, p. 249). According to the Feldstein-Horiaka puzzle reality lies between these two extremes (Grätner, 2009, p. 281).
The correlation between domestic investment (% of GDP) and GDP growth (% annual) is also relevant. The correlation between them is 0.54. This implies that there may exist a relationship between domestic investment (% of GDP) and GDP growth (% annual).
2 See appendix 2 for a graph of the Feldstein-Horiaka puzzle.
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It is also necessary to look how the results change with the addition of foreign direct investment (% of GDP). Foreign direct investment (% of GDP) had fluctuated around the 0% from 1977 to 1997. In the period from 2000 to 2005 it had fluctuated around the 0,2%. Thereafter, a sharp decline and a big increase until it had reached the value of 0% in 2011.
Figure 8: Foreign direct investment, net inflows (% of GDP)
The correlation between foreign direct investment (% of GDP) and domestic investment (% of GDP) is -0.43 (appendix 2.3). This implies that foreign direct investment (% of GDP) has a weak negative effect on domestic investment (% of GDP).
4.2 Statistical test for relationship between gross domestic savings (% of GDP) and GDP growth (% annual).
In the first test3 the relationship between gross domestic savings (% of GDP) and GDP growth (% annual) was tested. H0 was B1 = 0 and H1; B1≠ 0. The results of this test were that the null hypothesis was rejected in favour of the alternative hypothesis. It is possible to reject H0 when test statistic is higher than 2.042 or smaller than -2.042. Our results are that the observed test statistic is 3.76.
Consequently there is enough evidence for a relationship between gross domestic savings (% of GDP) and GDP growth (% annual). To test the direction of the
relationship the observed test statistic was compared to the rejection value of 2.750. It is higher than 2.750. Thus, there is enough statistical evidence that there exist a positive relationship. The value of R-squared was 0.3127. Implying that 31,27% in the variance in GDP growth (% annual) is explained by gross domestic savings (% of GDP).
Figure 9: OLS for relationship between gross domestic savings (% of GDP) and GDP growth (% annual)
3 See appendix 5 for the results of the statistical test for the relationship between gross domestic savings (% of
GDP) and GDP growth (% annual).
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In the second test4 the inverse relationship between gross domestic savings (% of GDP) and GDP growth (% annual) was tested. In this test H0 was Y1 = 0 and H1; Y1 ≠ 0. The null hypothesis was rejected for the alternative hypothesis. The observed test statistic was also 3.76 and this test statistic is higher than 2.042. Thus, there exist enough statistical evidence of a relationship between GDP growth (% annual) and gross domestic savings (% of GDP). The observed test statistic is higher than 2.750. It is therefore possible to conclude that there exist a positive relationship between gross domestic savings (% of GDP) and GDP growth (% annual). The value of R-squared was also 0.3127.
Figure 10: OLS for inverse relationship between gross domestic savings (% of GDP) and GDP growth (% annual)
4 See appendix 6 for the results of the statistical test for the inverse relationship between gross domestic
savings (% of GDP) and GDP growth (% annual).
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4.3 Statistical test for positive relationship between gross domestic savings (% of GDP), domestic investment (% of GDP) and GDP growth (% annual).
The test5 of the relationship between gross domestic savings (% of GDP) and
domestic investment (% of GDP) has given the following results. The null hypothesis was B1 = 0 and the alternative hypothesis was B1 > 0. The rejection value is 2.750. The observed test statistic was 20.79, this is larger than 2.750. The null hypothesis is rejected in favour of the alternative hypothesis. Thus, there is a positive relationship between gross domestic savings (% of GDP) and domestic investment (% of GDP). The R-squared value was 0.9331. This implies that there exist a very strong
relationship between gross domestic savings (% of GDP) and domestic investment (% of GDP).
Figure 11: OLS for relationship between gross domestic savings (% of GDP) and domestic investment (% of GDP)
5 See appendix 7 for results of statistical test for the relationship between gross domestic savings (% of GDP)
and domestic investment (% of GDP).
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Furthermore, the relationship between domestic investment (% of GDP) and GDP growth (% annual) was tested6. H0 was Y1 = 0 and H1; Y1 > 0. The results of this test were a rejection of the null hypothesis in favour of the alternative hypothesis. The observed tests statistic of 3.58 is higher than the rejection value of 2.750. Thus, there is enough statistical evidence for a positive relationship between domestic investment (% of GDP) and GDP growth (% annual). The R-squared was 0.2921. This means that the positive relationship between domestic investment (% of GDP) and GDP growth (% annual) is not very strong.
Figure 12: OLS for relationship between domestic investment (% of GDP) and GDP growth (% annual)
6 See appendix 8 for results of statistical test for the relationship between domestic (% of GDP) and GDP growth
(% annual).
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4.4 Statistical test for positive relationship between gross domestic savings (% of GDP), domestic investment (% of GDP) and GDP growth (% annual) by
including foreign direct investment, net inflows (% of GDP).
This tests7 the relationship between gross domestic savings (% of GDP), foreign direct investment, net inflows (% of GDP) and domestic investment (% of GDP). The null hypothesis was B1 = 0 and B2 = 0 and the alternative hypothesis was B1 > 0 and B2 > 0. The observed test statistic was 18.55 for gross domestic savings (% of GDP) and -0.84 for foreign direct investment, net inflows (% of GDP). The value of gross domestic savings (% of GDP) is higher than the rejection value of 2.750, but the value of foreign direct investment, net inflows (% of GDP) was not. Thus, there is enough statistical evidence to conclude that there exist a positive relationship between gross domestic savings (% of GDP) and domestic investment (% of GDP). The effect of foreign direct investment, net inflows (% of GDP) is not relevant. R- squared was 0,9346. This implies that there exist a strong relationship between them. However, the R-squared without foreign direct investment, net inflows (% of GDP) was 0.9331. Consequently foreign direct investment (% of GDP) had little influence on domestic investment (% of GDP).
The second tests8 for the existent of a relationship between gross domestic savings (% of GDP), foreign direct investment, net inflows (% of GDP) and GDP growth (% annual). H0 was Y1 = 0 and Y2 = 0. The alternative hypothesis was Y1 > 0 and Y2 > 0. The rejection value is 2.750. The observed test statistic was 2.83 for gross domestic savings (% of GDP) and -1.76 for foreign direct investment, net
inflows (% of GDP). The test statistic for gross domestic savings (% of GDP) is higher than the rejection value, but the test statistic for foreign direct investment, net inflows (% of GDP) is not. Thus, gross domestic savings (% of GDP) has a positive effect on GDP growth (% annual), but foreign direct investment, net inflows (% of GDP) not. The value of R-squared was 0,3770. This means that the relationship between them is not very strong. Without foreign direct investment, net inflows (% of GDP) the R-squared was 0.3127. Therefore the role of foreign direct investment is limited.
7See appendix 9 for results of statistical test for the relationship between gross domestic savings (% of GDP),
foreign direct investment, net inflows (% of GDP) and domestic investment (% of GDP).
8 See appendix 10 for results of statistical test for the relationship between gross domestic savings (% of GDP),
foreign direct investment, net inflows (% of GDP) and GDP growth (% annual).
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4.5 Comparing the statistical tests.
The conclusion of section 4.2 is that there seems to be a relationship between gross domestic savings (% of GDP) and GDP growth (% annual) and a relationship
between GDP growth (% annual) and gross domestic savings (% of GDP). However, the relationship between them is not very strong.
There is also statistical evidence in section 4.3 for a positive relationship between gross domestic savings (% of GDP) and domestic investment (% of GDP). This relationship is very strong in contrast with the relationship between domestic investment (% of GDP) and GDP growth (% annual). There exist evidence for a positive relationship between domestic investment (% of GDP) and GDP growth (% annual)
However, foreign direct investment is not relevant in the case of Japan. In the statistical tests foreign direct investment, net inflows (% of GDP) is rejected as an important factor. Also the value of R-squared had not changed much with the addition of foreign direct investment, net inflows (% of GDP).
Chapter 5: Conclusion
The conclusion of this bachelor thesis is that there is evidence for a relationship between gross domestic savings (% of GDP) and GDP growth (% annual) in Japan. The correlation between them is 0,56 and the R-squared is 0,3127. This implies that the relationship is not strong.
However, there exist a strong relationship between gross domestic savings (% of GDP) and domestic investment (% of GDP). The correlation between them is 0.96 and the value of R-squared is 0.9331. Though, the effect of domestic investment (% of GDP) on GDP growth (% annual) is limited. The correlation is 0,56 and R-squared is 0.2921.
The role of foreign direct investment, net inflows (% of GDP) is not relevant, because in the statistical test it is rejected as a relevant factor. The values of R-squared have also not changed much with the addition of foreign direct investment, net inflows (% of GDP).
The relationship between domestic savings and growth means that it is possible for the central Bank of Japan to influence economic growth by depress or stimulate savings. But the effect on growth is not that strong. It is therefore better to search for other ways to stimulate economic growth. The linkage between savings and investment is strong. This implies that it is profitable to affect savings to stimulate investment in the economy. However, the effect of investment on economic growth is not very strong.
Further research is needed to investigate the effect of other factors in the gross domestic savings (% of GDP) and GDP growth (% annual) relationship. By controlling for these factors the effect of gross domestic savings (% of GDP) on growth of GDP can be investigated more accurately. Besides, the relationship between savings and growth of GDP needs to be investigated for other time periods to get a complete answer of the effect on savings on economic growth.
Chapter 6: References
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2) Attanasio, Orazio P. Picci, Lucio. and Scorcu,Antonello E. 2000.’’ Saving, growth, and investment: a macroeconomic analysis using a panel of countries.’’ Review of
Economics and Statistic 82(2): 182 – 211.
3) Alguacil, Maite.; Cuadros, Ana. and Orts, Vicente.2004.’’Does saving really
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Chapter 7 Appendices Appendix 1
Datum Net household savings (JPY MIL) Net savings corporate sector (JPY BIL) Net government savings (JPY MIL)
30-6-1970 5997811 3500261 30-6-1971 7076019 3845961 30-6-1972 8400574 3733004 30-6-1973 12106627 5367498 30-6-1974 17630101 5720876 30-6-1975 19555314 1743212 30-6-1976 22535977 554329 30-6-1977 22612989 1482372 30-6-1978 23019339 380403 30-6-1979 19998222 2842153 30-6-1980 22550837 12051,7 3696180 30-6-1981 26420189 9532 5224132 30-6-1982 25929473 9722,4 4039945 30-6-1983 26574160 9190,4 2404178 30-6-1984 28093836 10232,8 5552732 30-6-1985 28350866 12380,3 8584129 30-6-1986 27597891 15118,1 8757808 30-6-1987 24425467 15536,2 13311981 30-6-1988 27436788 16065,8 18056937 30-6-1989 29838349 12206,7 22615364 30-6-1990 32308737 11390,6 27634427 30-6-1991 39371907 9203,5 28719460 30-6-1992 37907695 6157,8 26476205 30-6-1993 36516251 9045,1 15706407 30-6-1994 33808000 5233,1 8435600 30-6-1995 32468300 9900,1 3443400 30-6-1996 25941600 17590,5 3557900 30-6-1997 24914300 18900,4 3595600 30-6-1998 29433600 14725,8 -4724100 30-6-1999 24849300 20662 -12311800 30-6-2000 20684500 28002,8 -13124800 30-6-2001 10839500 26940,4 -11644100 30-6-2002 8992700 34288,1 -22466700 30-6-2003 7233300 40429,4 -24399500 30-6-2004 5995800 47039,9 -25771100 30-6-2005 4183500 43423,8 -19239800 30-6-2006 3343600 38034,4 -12002500 30-6-2007 2676200 42424 -10891900 30-6-2008 1285800 34116,9 -14853400 28
30-6-2009 6747800 32529,2 30-6-2010 5672900 42299,7 30-6-2011 7591000 35182,3 30-6-2012 3671700 36669,9 Appendix 2 29
Appendix 3 Data graphs Datum Gross domestic savings (% of GDP) Investment (% of GDP) GDP Growth (Annual %) Foreign direct investment, net inflows (% of GDP) 30-6-1961 12,044 29-6-1962 8,909 28-6-1963 8,474 30-6-1964 11,677 30-6-1965 5,82 30-6-1966 10,639 30-6-1967 11,082 28-6-1968 12,882 30-6-1969 12,478 30-6-1970 40,055 -1,024 30-6-1971 38,22 4,699 30-6-1972 37,592 8,414 29-6-1973 37,876 8,033 28-6-1974 36,348 -1,225 30-6-1975 32,607 3,092 30-6-1976 32,423 3,975 30-6-1977 32,262 4,39 0,00282 30-6-1978 32,429 5,272 0,001 29-6-1979 31,401 5,484 0,02313 30-6-1980 31,149 32,139 2,818 0,02576 30-6-1981 31,714 31,064 4,177 0,01581 30-6-1982 30,36 29,768 3,377 0,0394 30-6-1983 29,42 27,799 3,061 0,03366 29-6-1984 30,235 27,672 4,464 -0,00077 28-6-1985 31,496 28,193 6,333 0,04606 30-6-1986 31,777 27,961 2,831 0,01103 30-6-1987 31,395 28,494 4,107 0,04672 30-6-1988 32,749 30,66 7,147 -0,01598 30-6-1989 33,274 31,828 5,37 -0,03441 29-6-1990 33,396 32,528 5,572 0,05727 28-6-1991 33,786 32,253 3,324 0,03635 30-6-1992 32,66 30,577 0,819 0,07164 30-6-1993 31,407 29,258 0,171 0,00269 30-6-1994 30,037 28,048 0,864 0,0188 30-6-1995 29,453 28,098 1,942 0,00074 30
28-6-1996 29,076 28,615 2,61 0,00441 30-6-1997 29,161 28,086 1,596 0,074 30-6-1998 27,966 26,1 -2,003 0,08349 30-6-1999 26,322 24,731 -0,199 0,27768 30-6-2000 26,553 25,105 2,257 0,17389 29-6-2001 24,944 24,304 0,355 0,14883 28-6-2002 23,801 22,459 0,29 0,22828 30-6-2003 24,055 22,399 1,685 0,14498 30-6-2004 24,461 22,504 2,361 0,16768 30-6-2005 23,874 22,466 1,303 0,09459 30-6-2006 23,937 22,681 1,693 -0,10612 29-6-2007 24,574 22,884 2,192 0,52597 30-6-2008 23,171 22,977 -1,042 0,60547 30-6-2009 20,032 19,665 -5,527 0,30747 30-6-2010 21,018 19,823 4,652 0,0197 30-6-2011 19,046 20,204 -0,57 0,00134 29-6-2012 18,614 20,795 1,957 0,04237 28-6-2013 21,022
Appendix 4 Correlation in Stata (1980 - 2012).
Growth1 = GDP growth (% annual)
Saving 1 = Gross domestic savings (% of GDP) Investment1 = Investment (% of GDP)
Foreign1 = Foreign direct investment, net inflows (% of GDP)
Appendix 5
Appendix 6
Appendix 7
Appendix 8
Appendix 9
Appendix 10
