Aversion to risk poses challenge to reversing the prolonged deflation in the economy
Suparna Goswami Bhattacharya
November 22, 2016: Despite being among the most industrialised and developed nations in the world, Japan surprisingly scores very low on financial literacy. According to a survey by the Central Council of Financial Services Information, Japanese are averse to taking financial risk, underscoring the difficulty in reversing the prolonged deflation in the economy. Twenty-five thousand individuals aged 18 to 79 participated in the survey.
One of the key goals of the Bank of Japan’s aggressive monetary stimulus programme, deployed in 2013, was to prompt households to shift money away from deposits and into investment. Although the Japanese government has tried to encourage money to flow from savings into investing, big change has not occurred because of strong loss aversion.
Only 30% of Japanese households have experience investing in stocks and nearly 80% say they would not take on risk even for an investment yielding significant returns.
Asked whether they would invest 100,000 yen ($972) if there was a 50% chance of producing a 20,000-yen gain after a year and the same probability it would produce a 10,000-yen loss, 78.6% said they would not invest.
“The survey illustrates the characteristics of Japanese households, one of which is their strong risk aversion,” said Noriaki Kawamura, the council’s director and head of a BOJ group in charge of promoting financial literacy.
Interestingly the survey also showed that respondents who had a financial education were more likely to exhibit desirable financial behaviour, such as making comparisons while purchasing a product.
The percentage of correct answers given by students who had participated in financial education (56.4%) was higher than that of correct answers given by students who had not participated in such education (38.2%), and was also higher than the average for all age groups (55.6%).
Shaun Mundy, international financial literacy consultant and former head of financial literacy at the UK’s Financial Services Authority, says in order to improve financial literacy of a population it is important to go beyond just providing financial education in schools. “One has to make learning finance more fun. My experience suggests that these objectives are most likely to be achieved if a wide range of institutions work together under a well-resourced lead organisation,” says Mundy.
The survey is part of policymakers’ efforts to enhance financial literacy in Japan, which lags behind the United States and Europe, and encourage households to avoid hoarding cash and accept more risk.
A comparison drawn between Japan and the US (which conducted a similar survey) shows the former scores 7% less than US in giving correct reply to questions. In terms of characteristics of behaviour, fewer respondents in Japan felt they had too much debt and more respondents had set aside emergency or rainy day funds than in the United States.
Further, the percentage of those who chose desirable behaviour was 7–17% lower in Japan than in Germany or the United Kingdom.
David Kneebone, general manager of the Investor Education Centre in Hong Kong, said the survey has provided a great reference point with regards to various segment groups. “Japan enjoys long life expectancy, which raises financial retirement challenges if things are not properly planned. And echoing Japan’s research findings, Hong Kong’s survey also revealed that our people lack adequate retirement planning for our retired years. We look forward to more peer collaboration and sharing of best practices to help raise awareness of the need to manage money better throughout life.”