The aging society, savings rates, and regional flow of funds in Japan

•Estimate the impact of population aging on regional saving rates in Japan.•The effects of population aging are different depending on demographic structures.•The population aging had a positive effect on the regional saving rate until the mid-1990s.•But it came to have a negative effect after the mid-1990s.•Rural economies where deposits exceeded loans in the past will face a shortage of funds. This study examines the impact of population aging on regional savings rates in Japan, with particular attention to the regional flow of funds. Population aging has a positive impact on the average savings rate when the working-age population is large, it but has a negative impact when the working-age population decreases. Our empirical results, based on prefecture-level panel data, support the theoretical implication. After the mid-1990s, the working-age population declined, and the retired age population increased in many prefectures. As a result, population aging, which had a positive effect on the regional savings rate until the mid-1990s, came to have a negative effect thereafter. The empirical results suggest that in rural economies where deposits exceeded loans in the past, deposits are expected to decline due to the aging of society, resulting in a shortage of funds in the near future.