Household Portfolios in Japan: Interaction between Equity and Real Estate Holdings over the Life Cycle

I study the relationship between portfolio choice and age for the Japanese households by means of micro data and by paying particular attention to the interaction between decisions to hold stocks and real estate. The major findings are: First, equity shares in financial wealth (S/FW) increase with age among young households, peaking in the fifties age group, then becoming constant. This peak comes in a much later stage of the life cycle compared with Amerkis and Zeldes (2001) report about U.S. households. Second, we observe exactly the same age-related pattern for real estate shares in household total wealth (RE/TW). Third, with respect to both shares, S/FW and RE/TW, the age-related patterns are mostly explained by the decision to hold or not to hold stocks/real estate. Fourth, no age-related pattern in equity holding is observed for households that do not own real estate. These findings suggest that the age-related pattern observed in stock holding will be mostly explained by household's tenure choice of housing. Households who are to purchase and have just purchased houses cannot take risky positions in financial investment because they are saving for down payments or taking heavily leveraged positions by taking out housing loans. Therefore any serious attempt at modeling Japanese households' dynamic portfolio choice should incorporate the effect of housing tenure choice. In the second half of the paper, we draw some policy implications from these findings.