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News Release

The Impact of Smaller Households on Consumer Spending

September 5, 2006

Overview

Consumer spending has been growing ever since the late 1990s, when the Japanese economy was stagnant, underpinning the economy. However, this upward trend is not due to income growth, but mainly to a rise in the average propensity to consume.This report examines the boost to consumer spending provided by changing populationstructure asa factor behind the rise in the average propensity to consume. In particular, it focuses on the fact that, as household size has declined, the amount of per capita consumption expenditure has risen, and calculates the boost to consumption this has provided.

The calculation involves, first, fixing the amount of per capita consumption at the level recorded in the base year, and comparing change in the population structure alone to the total amount of consumption. Specifically, it adds up the amounts obtained for "population × per capita consumption amount" by age of head of household and number of persons in household, to obtain the overall consumption amount. It then breaks down the factors of fluctuation in the amount of consumer spending obtained from this calculation into three categories: (i) population factors, (ii) age factors, and (iii) size of household factors.

The results show, clearly, that, since the 1990s, the changing population structure has provided a significant boost to consumer spending. The downward trend in household size, in particular,has made an important contribution to the rise in consumption, boosting consumer spending by an annualized rate of 0.7% in the first half of the 1990s, by 0.6% in the second half of the 1990s, and by 0.5% in the first half of the 2000s. This means that, in terms of the level of consumption and taking 1990 as the base year, the size of household factors alone had boosted consumer spending by 6.2% as of the year 2000, and by 9.1% as of 2005. The boost provided to average propensity to consume between 1995 and 2005 is also likely to have been around 5 points.

Thus, the shrinking size of households is highly likely to have been an important factor in the growth of consumer spending against a backdrop of income stagnation. Looking to the future, as the downward trend in the size of households is set to continue and will continue to boost consumer spending, it is probable that consumer spending will remain firm overall.However, given the increasing number of single-person households and the decline in the size of family households, among other factors, it is highly likely that the structure of consumption will undergo major changes, and it will be ever more important to respond actively to changing consumer needs.

Inquiries relating to the content of this report, etc. should be addressed to Ishikawa , Economics Department, the Japan Research Institute, Limited.

Tel: 03-3288-4524
E-mail:matsumura.hideki@jri.co.jp

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