PENSIONERS in Japan cannot help getting older, but could they be richer? The country’s vast public-pension fund, to which every citizen must contribute, is poorly managed. Last year it lost money (Ұ5.65 trillion, around $47 billion). Reform may now be on the way, perhaps with big implications for the Tokyo market.
The fund is the world’s largest publicly invested pension pot, with ¥150 trillion of assets. But the capital is mostly stagnant. Around two-thirds is parked in Japanese government bonds (JGBs), whose ten-year yield hovers at a modest 1.6%. Bureaucrats with little investment nous are in charge. Returns are low, at some 3.5% annually, compared with around 7% for public pension funds in Norway and Sweden, and 10% in Canada and France. Pension money was squandered in the past on things like building holiday resorts in preposterous but politically important places.
Without better returns, the government will have to reduce its support for the old or raise taxes; neither will be popular. To improve the fund’s performance, a group of politicians from the ruling Liberal Democratic Party (LDP) has called for a sliver of the pension purse, ¥10 trillion, to be set aside to create a sovereign-wealth fund. It would be run by professional managers, not necessarily from Japan, rewarded with performance-based salaries. The fund would be independent of bureaucratic and political meddling. Its working language would be English.
Previous efforts to reform the pension fund have been quashed by Japan’s Jurassic bureaucracy, as was an earlier attempt to create a sovereign-wealth fund using foreign-exchange reserves. Risky investments put the public’s money in peril, say detractors. To overcome this resistance, the proposed fund would maintain the same allocation to JGBs as the current one. If it can produce better returns from the portion of its capital that is actively invested, it may sway public opinion in favour of increasing its size and changing its allocation away from safe-but-sorrowful JGBs, explains Kotaro Tamura, an LDP legislator. The plan is a Petri dish for a potentially much bigger investment pool.
Any long-term shift away from JGBs may have broader fiscal consequences. The government’s debt is around 180% of GDP, the largest among industrialised countries. But it borrows cheaply, partly because the pension fund is a captive buyer. If the fund were to seek more enticing assets elsewhere, the government would have to offer better terms on its bonds, raising its cost of borrowing.
Some officials fear this would harm the national economy. But the true consequences would probably be more subtle. Pensioners would be better off, possibly at the expense of future taxpayers, who would bear the burden of repaying the government’s more costly debt.
There may be wider gains. The plan’s backers hope that fresh funds and cannier investment will give the Tokyo stockmarket a lift, by putting pressure on companies to improve shareholder value. Better performance may also inspire individuals to invest more creatively. Japanese households sit on ¥1,500 trillion of assets, half of which is buried in bank deposits earning scant interest. Unleashing that capital would really help to cushion old age.