Wealth, Financial Literacy and Behavioral Biases in Japan: the Effects of Various Types of Financial Literacy

This paper considers the relationship between wealth, financial literacy and several other variables using data from Japan's first large-scale survey on financial literacy. Using an instrumental variables approach to account for possible endogeneity of financial literacy, we find that financial literacy has an economically large and positive impact on wealth accumulation. We also decompose financial literacy into 5 sub-categories and find that deposits literacy, risk literacy and debt literacy have significant impacts on wealth accumulation in Japan, whereas inflation literacy and insurance literacy do not. Several variables suggested by behavioral economics, such as over-confidence, self-control, myopia and risk-aversion are also significant determinants of wealth.