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The Small Saving Tax Exemption and Japanese Household Asset Allocation Behavior

In this article, I estimate asset demand equations for Japanese households using age-group data from a government survey called the Family Saving Survey, and based on the estimation results, conduct a simulation analysis of the impact of the 1988 and 2006 revisions of the Small Saving Tax Exemption for interest income (the so-called Maruyu System) on household portfolios. In the estimation, I define marginal tax rates by age group, taking into account for the first time the amount of principal that is tax exempt and estimate asset demand equations by three-stage least squares to deal with the endogeneity of rates of return, which previous analyses of the revision of the Maruyu System and of household portfolios in Japan have not done. I find that both the 1988 and 2006 revisions of the Maruyu System promote a shift in household portfolios away from Maruyu assets and toward non-Maruyu assets, as expected. However, I also find that although the percentage changes in the case of the 1988 revision are quite considerable, those in the case of the 2006 revision are quite small. Thus, it appears that the 2006 revision hardly affected household portfolio behavior at all.