Japan's wealth transfers from corporates to households

As net domestic fund demand had been about zero (0%) for a long time in Japan, corporates were steadily deleveraging, leading to an abnormally high corporate savings rate.

As a result, wealth was transferred from households to corporates, i.e. aggregate wages shrank. In other words, the government's expenditure was not sufficient to offset such wealth transfers. In this way, the deterioration in household fundamentals led to a deterioration in consumer sentiment. This led to increasingly sluggish domestic demand.

The economy was caught in a vicious cycle which led to a further pause in corporate activities.

However, fortunately, the situation has changed thanks to Abenomics. Corporate activity is recovering while fiscal expenditure has increased, and this sparked a revival in net domestic fund demand (i.e. spending power for corporates and the government recovered). Expenditure by corporates and the government will lead to an expansion of aggregate wages. 

The direction of wealth transfers has now reversed. This is, in turn, supporting expansion of domestic demand. The direction of wealth transfers from corporates to households has an inverse correlation with net domestic fund demand and the household savings rate.

The fundamentals of households have now improved, and a shift is seen in trends in net domestic fund demand as well as in the household savings rate. Net domestic fund demand is now expanding (i.e. spending power for corporates and governments has improved) and, at the same time, the household savings rate has increased, says Societe Generale.