Japan Pensions: Where is the Incentive?

It seems that, little by little, the world is waking up to the importance of all this. Last week it was the Italian Minister of the Interior, this week it is the director of economic policy in Japan's cabinet office. When I started blogging about this, just over a year ago, it was much harder to get a hearing. This change is positive. OTOH too many people are continuing to fool themselves by thinking of this as a linear process. Here, non-linearities will be everything. Two examples in the report: number one, is the cost of having children, and the inability of society collectively to address this because of the scale of the fiscal problem which already exists coping with the elderly. Secondly, young people are dropping out of the pensions system. It is logical: if you put more in than you are ever going to get back, where is the incentive?

Already mired in its worst economic slump in decades, Japan may well see its growth decline even further as its citizens age and its population shrinks, the government said in an annual economic assessment released Friday. The report suggested Japan needs to take stronger measures to encourage people to have more children, and to make its domestic markets more attractive to foreign investment. "Japan is experiencing aging unprecedented in history," said Jun Saito, the director of economic policy and analysis at the Cabinet Office, which authored the report.


Addressing the aging problem for the first time, the annual assessment noted the country's population between the ages of 16 and 54 has already started to slide and added that growing numbers of retirees are trimming the nation's huge savings pool. Economists say Japan's high saving rate was a major factor driving the country's rapid growth in the decades after World War II. The savings households deposited in Japanese banks provided a ready supply of capital that industry borrowed to invest in new plants and equipment. But today, Japan is a net creditor to the world and attracts little in the way of foreign savings - one source of funds countries often turn to when there is a shortage at home, Saito said.


Along with attracting overseas capital and raising labor productivity, the report stressed the need to help women have careers and children, instead of choosing one or the other. Saito said one option would be to set up more day-care centers, a step the government pursues now. The report said the average Japanese woman now faces incentives not to have children: She loses 85 million yen ($772,000) over her lifetime if she quits her job to give birth - even if she returns to work afterward.

Japan's birthrate - which measures the average number of times a woman gives birth during her lifetime - dropped to 1.32 in 2002, the lowest on record, and after peaking in 2005, the population is on track to shrink by nearly a fifth by 2050, the government says. The changing demographic is already straining the country's pension system, with the government forecasting those now in their 20s through 40s will pay more into the system than they will receive due to the large numbers of elderly the country will support in coming years. This is causing more young people to opt out of paying into the system, creating an additional burden on government coffers.
Source: Yahoo News
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Row Over Resona Bailout

This is obviously part of the backdrop to the election campaign, and it is always hard to judge the significance of things in this context. But Resona is interesting, since it is a strange case, and it could give us some clues as to the real determination for serious reform in Japan. On the face of it, not encouraging.

The Democratic Party of Japan, the country's main opposition, is accusing the government of Junichiro Koizumi of "state-sponsored window dressing and fraud" when it bailed out Resona, the Japanese bank. DPJ officials will meet representatives of the Financial Services Agency, the banking regulator, on Monday and will argue that the government was aware that Resona was insolvent when the FSA decided to inject Y1,960bn ($17.9bn) to prevent the bank collapsing. The opposition's decision to accuse the government of acting illegally escalates the potential political fallout from the Resona rescue and is designed to put pressure on the prime minister and his ruling Liberal Democratic party ahead of a general election in November.

The DPJ will argue that the government deliberately used an inappropriate clause of the Deposit Insurance Corporation law to avoid the stigma of an embarrassing nationalisation as well as protecting shareholders from having the value of their holdings completely wiped out. Following the bail-out, Resona's share price rose sharply.

When it bailed out Resona, the government cited a section of the DIC law that can only be used for banks with a positive net worth. Other sections, however, are for use with "bankrupt financial institutions or financial institutions where assets are unable to fully repay liabilities".

An official at a credit rating agency who asked not to be named said: "In Resona's case, if it did have negative net worth at end-March 2003, as is suggested by the subsequent independent audit, it should have been declared insolvent and dealt with either under [sections] 102(2) or under 102(3)." Section 102(2) allows for the failed institution to be merged with another company, while section 102(3) allows for the full nationalisation of the bank, which would result in shareholders' equity being written down to zero.

Controversy over the Resona bail-out intensified after it was announced this month that the bank would report a far higher than expected loss of Y1,760bn for the first half of the year - a figure almost equal to the Y1,960bn injected by the government.
Source: Financial Times
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Japan Still On the Deflation Trail

Japan economy minister Takenaka tells us Japan will triumph over deflation. Just one last question: how? No, this isn't fair, he does offer some pointers. But it still remains to be seen what these actually mean in practice......

Heizo Takenaka, Japan's economy minister, said on Thursday that the country could overcome its persistent deflation because the central bank is working more closely with the government. The key reforming minister of Junichiro Koizumi's government said in an interview with the Financial Times that the co-operation followed the appointment of a new governor of the Bank of Japan in March.

On the eve of US president George W. Bush's visit to Tokyo, Mr Takenaka said the BoJ would aim to raise money supply growth from its current 2 per cent to between 3 per cent and 4 per cent. For its part the government would increase demand through deregulation and clean up the banking system so that the BoJ's looser monetary policy was transmitted to the economy as a whole. Mr Takenaka said: "By combining these two, our calculations say that we will be able to overcome deflation."His suggestion that the BoJ was co-operating with government policy comes after years in which many saw the central bank as a stubborn opponent of price stability............

With the economy growing in the second quarter at an annualised 3.9 per cent according to official statistics, now was the time to press home the advantage. The economy minister said: "We hope to create a virtuous circle."

Mr Takenaka praised Toshihiko Fukui, who became bank governor in March, suggesting that he was more determined than his predecessor to halt deflation. "Since Governor Fukui took office BoJ policy is, in my opinion, moving in a good direction," he said.

The consumer price index for August fell just 0.3 per cent from the previous year although, measured by the gross domestic product deflator, prices are still dropping by about 2.5 per cent a year.

Mr Takenaka said that, "even with the CPI nearing zero", the BoJ had signalled its commitment to easy monetary policy for as long as necessary. The BoJ was "contemplating right now" how to signal its long-term commitment to price stability, with some BoJ members advocating a reference rate, a goal just short of an inflation target, he said.
Source: Financial Times
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Japan: Conflicting Signals?


Along with the renewed pressure from the Bank of Japan against the rise of the yen, here is one more small piece of evidence that all may not be as well as the markets imagine:

Machinery orders placed by Japanese companies fell by a bigger-than-expected margin in August, according to official figures released on Wednesday, indicating an uncertain outlook for capital expenditure which has fuelled Japan�s nascent economic recovery. Orders for machinery made by private Japanese corporations, seen as an indicator of capital expenditure about six months ahead, fell 4.3 per cent in August from July, the Cabinet Office said. On a year-on-year basis, they rose 12.2 per cent, a smaller increase than expected. The weak data, together with the strong yen that on Wednesday traded at Y109.5 against the dollar, accelerated the decline in the Tokyo stock market, which fell for the first time in five days. The Nikkei 225 ended 2.6 per cent lower at 10,542.20.
Source: Financial Times
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