The role of household debt heterogeneity on consumption: Evidence from Japanese household data

BIS Working Papers  |  No 736  | 
24 July 2018



Household debt has risen sharply around the globe in the past two decades. There is growing interest in the relationship between household debt and consumption. Previous studies show highly indebted households are more sensitive to income changes than those with little-to-no debt. A better understanding of the relationship would help policymakers respond appropriately to changing economic and debt conditions.


This study uses Japanese household survey data to analyse the impact of debt burdens on consumption. One unique feature is the ability to use survey information about households' concerns about future unemployment spells and saving sufficiently for old age. We investigate how these concerns influence current consumption decisions.


Japanese households tend to save more when they have a higher level of debt. In particular, they are sensitive to unexpected declines in income. These results are consistent with findings for other countries. The households' concerns about the latter stages of life and (unlikely) unemployment risks are seen as key motives for household precautionary saving, especially for middle-age households (from the late 30s to the early 60s). This implies that well funded pension and health insurance systems could reduce the sensitivity of households' consumption behaviour to income changes.



This paper estimates the impact of household debt on consumption behaviour using data from the Japanese Preference Parameters Study. Covering the 2005-13 period, the survey is the first of its kind for Japan. It features responses to forward-looking questions about key risks to income, shedding light on the motives for household savings behaviour. The analysis finds that household marginal propensities to consume (MPCs) were significantly higher for highly-indebted Japanese households than for those with little-to-no debt - a type of variation that is consistent with findings for other countries. The evidence points to a significant precautionary saving motive by Japanese households, with savers particularly concerned about (unlikely) future unemployment spells and longevity risks.

JEL classification: D14, D81, D84, E21, G11

Keywords: household debt, marginal propensity to consume, precautionary saving motive