This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Pensionitis Delays Recovery in Japan

TOKYO -- What does the number of seats in Japan's parliament, the Diet, have to do with public pension reform? Quite a bit, and the link is delaying the country's economic recovery.

One of the reasons the Japanese are saving so much these days and spending so little is fear the nation's pension system won't be there for them when they retire. To put it in perspective, U.S. concerns about the Social Security system make Americans look like hypochondriacs compared to the retirement nightmare Japan is heading into.

Every Japanese knows corporate pensions are massively underfunded. The country's public pensions are an equally troubling time bomb. Experiencing a declining birth rate, Japan is graying at an alarming pace as fewer workers support an ever-increasing number of retirees. In 1975, 23 workers funded the pension of each retiree. In 1997, the ratio had plummeted to 4 to 1. Twenty-five years from now, it's expected to be 2 to 1.

Currently, the premiums paid by employees and their employers in Japan amount to roughly 17% of a worker's monthly income. If today's public pension system is not revamped, that figure will likely rise to a staggering 34% by 2025.

After years of hand wringing, the Japanese government is finally moving to reform public pensions. They're hoping to cap the premium burden at 30% and ensure the system doesn't go belly up. This spring, the Japan's Ministry of Health and Welfare issued a report calling for a reduction in benefits, a freeze in premium hikes for now and an increase in the ratio of subsidies the government chips into the system from one-third to one-half.

Prime Minister Keizo Obuchi was hoping to get formal deliberations on pension reform, which would likely include debate over the introduction of defined-contribution plans like America's 401(k) program, started during the current session of parliament. But delay looks like the watchword for the time being.

One of the big causes for the holdup is Ichiro Ozawa, president of the Liberal Party, which is the ruling Liberal Democratic Party's junior coalition partner. The hard-hitting Ozawa is foisting a radical proposal to entirely scrap worker/employee contributions as a source of pension funding. Instead, he wants to have the entire "basic pension" financed by Japan's consumption tax. (The basic pension is the foundation of the country's multilayered public pension scheme.)

Ozawa has long championed the idea that the consumption tax, now at 5%, should be used solely for welfare purposes. To be sure, he has some sound reasons for making this demand. Funding Japan's public pensions with the consumption tax would provide more reliable revenue streams and it would broaden the base of contributors to all generations, including retirees.

Nevertheless, Ozawa has a political agenda to keep, as well. For the past few months, Obuchi has been working feverishly to bring Japan's second-largest opposition party, the Komeito, into his ruling coalition. For Obuchi, an alliance with the Komeito means an even more commanding majority in Japan's powerful lower house. More importantly, the Komeito's 24 upper-house seats would give Obuchi the majority he's craved in that chamber.

Problem is Ozawa wants to reduce the number of seats in the lower house in a manner that would hurt small parties like the Komeito. Ozawa even got Obuchi to agree to the idea as a condition for the Liberals to join the ruling coalition early this year. In fact, the Liberal Democratic Party, or LDP, and Liberals submitted a bill to parliament just last month to cut the number of lower-house seats.

The good money has it that Obuchi intends to let the bill die on the vine. If he doesn't, the Komeito will bug out immediately and the prime minister will be deprived of a majority in the upper house.

Knowing this, Ozawa is reportedly putting the squeeze on Obuchi, threatening to stand firm with his pension-plan proposal unless the prime minister follows through with his commitment to rejigger the parliament. Essentially, Ozawa is holding pension reform hostage to parliamentary reform.

Does Ozawa have Obuchi cornered? Not really. The prime minister knows that Ozawa isn't working from a position of strength. His Liberal Party is smaller than the Komeito. If Ozawa bolted, an LDP-Komeito alliance would have enough seats to control both chambers of parliament on their own. Obuchi also knows Ozawa is probably not terribly excited about the prospect of exiting the ruling alliance. As the leader of a small party in the opposition, Ozawa would spin off into political irrelevance.

Furthermore, Ozawa must know he's fighting an uphill battle. His proposal to fund public pensions would require significant increases in the highly unpopular consumption tax. Most LDP lawmakers don't want to touch that with a 10-foot pole. As for reducing the seats in parliament, Obuchi will fight Ozawa tooth and nail to kill the idea. The Komeito is simply too important to Obuchi to alienate.

In the end, Obuchi will likely get Ozawa to back away from his demands on pensions and the parliament. If Ozawa refuses to back down, he risks getting dumped by Obuchi and replaced by the larger Komeito.

In the meantime, Japan's worried consumers will keep their wallets closed and continue to save like there's no tomorrow -- because no tomorrow is exactly what most Japanese fear the future holds without sweeping public pension reform.

John F. Neuffer, a longtime observer of Japanese politics, is an analyst at Mitsui Marine Research Institute. He writes occasional commentary for TSC. Neuffer publishes an in-depth roundup of Japanese politics at his Web site, www.behindthescreen.com. The views expressed above are those of Neuffer and not necessarily those of MMR. This column is exclusive to TheStreet.com.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,804.80 +26.65 0.15%
S&P 500 2,070.65 +9.42 0.46%
NASDAQ 4,765.38 +16.9840 0.36%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs