How a Landmark Japanese Study Will Boost Financial Education
By Dan Kadlec
October 11, 2016
Individuals that receive some financial education in their lifetime exhibit vastly better financial practices—especially as it relates to prudent risk taking and long-term thinking, according to a landmark Japanese study released in Tokyo this summer.
Right About Money is the first U.S. outlet to report the findings, which were translated into English and made available this week. The study from the Central Council for Financial Services Information, part of the Bank of Japan, generated hundreds of news reports in Japan over the summer, signaling a broad and growing concern with financial literacy in that country. Many jurisdictions have taken steps to beef up their financial education programs.
The chief finding was that those who had access to financial education posted the best financial literacy scores, and those with the best scores were more likely to:
Be less concerned about near-term losses and herd thinking
Set aside an emergency fund
Those with the best scores also were less likely to experience financial trouble or repeatedly take out consumer loans. They exhibited greater resiliency in economic shocks and were more likely to embrace stock ownership.
Perhaps the clearest and most interesting finding has to do with the Japanese peoples’ aversion to risk. Asked if they were to invest 100,000 yen with a 50% probability that it would produce a 20,000-yen gain after one year and the same probability it would produce a 10,000-yen loss, an overwhelming 79% said they would not invest. Answering another question, about half said they would take 100,000 yen today rather 110,000 yen a year from now, forgoing a certain 10% return.
This extreme aversion to loss has broad implications for the retirement security of the Japanese people. Less than a third in the survey said they owned risk assets likes stocks or “investment trusts.”
The survey was Japan’s first large-scale look at financial literacy at home. About half the questions were similar to those in surveys from the Financial Industry Regulatory Authority (FINRA) in the U.S. and the Organization for Economic Co-operation and Development (OECD) in Europe. Looking only at comparable questions, Japanese financial literacy lags the U.S., U.K. and Germany by about 7%.
Japanese respondents correctly answered just over half of true-false questions. The lowest rate of financial literacy was among those aged 18-29.
The Japanese are frugal and do some things well, according to the study. As many as 90% know how to manage a budget and more than half have an emergency fund. These are areas that generally need improvement in U.S. and Europe. But many Japanese remain much too risk averse and think only about the short-term. The encouraging news is that those who receive financial education are more likely to think longer term and accept greater risks.