401(k)-Style Plans Help Spur Japanese Markets

Trend could help country return to investment-heaven status, especially if government adds tax incentives.
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TOKYO -- Like many Japanese, Yuko Nakase was, until recently, resigned to letting her hard-earned savings wither in a postal deposit account.

That changed last year, when

Pasona

, the temporary staffing agency where she works, introduced a corporate pension plan styled on America's 401(k) system. The plan proved popular with Pasona's workers, mostly young women who do office chores for corporate clients, even though Japan has none of the tax benefits that have made the retirement program so popular in the U.S. "I am, or was, your typical Japanese who saves, but never invests," Nakase says. "The 401(k) changed all that."

Japan is in the midst of a pension revolution, one that is tempting domestic savers, like the Americans before them, back to the equity market. The movement could help return Japan to the investment-heaven status it held in the late 1980s, when U.S. and European investors piled in to ride the country's then-dazzling bull market. Many Japanese see defined-contribution plans, which give individuals control over their pension investments, fueling a stock-market rally, just as 401(k) plans have in the U.S. Already, the benchmark

Nikkei

index, which hovers near half the historic high it hit almost 10 years ago, is up 31% this year; small-caps are up more than 200%.

"As investors in 401(k)-like plans increase over three years and the economy improves, we'll see the Nikkei average shoot higher," says Toshio Sumitani, equity strategist at

Tokyo Securities

. He sees the Nikkei rising as much as 15% to 21,000 over the next six months.

Not surprisingly, Japan funds have benefited from this resurgence of interest. The average Japan fund is up about 95% so far this year, while the average U.S. diversified fund has risen just 19.2%, according to

Lipper

, a fund-tracking company. The top three funds --

(WPJPX)

Warburg Pincus Japan Small Company Fund,

(FJSCX) - Get Report

Fidelity Japan Small Companies and

(WPJGX)

Warburg Pincus Japan Growth Fund -- are all posting gains of more than 200%.

As individuals take charge of their own financial planning, money is seen flowing out of stodgy time deposits that currently pay as little as 1%. And with Japanese investors sitting on roughly $10 trillion in personal savings, about one-third of the world's total, even a trickle could prove torrential. Over the next decade,

Norinchukin Research Institute

, the research arm of one of Japan's largest financial institutions, sees as much as 70 trillion yen ($680 billion) flowing back into stocks and bonds.

Japanese securities firms, trust banks and insurance companies are already rolling out new mutual funds and savings products and backing them with revved-up marketing blitzes. And the public, perhaps more worried now than ever about job security, has responded. In the six months ended September, pension fund deposits at the country's seven largest life insurers were four times greater than they were in the six months ended March. Much of that money is earmarked for the stock market.

U.S. companies have also taken notice.

Fidelity Investments

has ramped up its operations and distribution systems, while

Massachusetts Financial

has opened up shop in Japan.

Merrill Lynch

(MER)

resurrected the retail arm of a collapsed Japanese brokerage and electronic brokers, like

E*Trade

(EGRP)

and

Schwab

(SCH)

, have begun setting up operations to take advantage of the changing environment and the growing popularity of the Internet.

The ease in which the Internet allows transactions will also help boost interest in equity investing. In the late 1980s, when Japan's economy roared and the stock market surged, households kept about 20% of their assets in stocks, according to the

Bank of Japan

. Now the figure is closer to below 7% -- one-sixth of the U.S. average.

"The money will come from people in their 20s and 30s who have to map out their future in an environment where lifetime employment and pay are not guaranteed," says Mitsuru Fujita, deputy general manager in charge of

Daiwa Securities

' 401(k) project.

Of course, much of this is contingent on the passage of legislation that allows individuals to shelter the proceeds of their investments from taxes. On Thursday, the tax committee of Japan's ruling

Liberal Democratic Party

released a string of proposals to craft exemptions for pension-related investments. While critics had wanted more -- some called for the exemptions to be three times bigger than the proposed breaks -- the debate process is clearly leaving the realm of the hypothetical and entering the practical.

In the meantime, expect to see more privately run pension plans, like Pasona's, which was created to entice temporary workers to maintain their registrations.

"Not only did it keep them returning," says Noriyoshi Yamaguchi, senior director of Pasona's 401(k) project, "it turned out to be an incentive for employees to start investing on their own."