MW-83 -- Babies, Bonuses and Pension Deficits

J@pan Inc Magazine Presents:
Weekly Financial Commentary from Tokyo

Issue No. 83
Tuesday, July 6, 2004

@@ VIEWPOINT: Babies, Bonuses and Pension Deficits

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@@ VIEWPOINT: Babies, Bonuses and Pension Deficits

A few weeks ago there was a very interesting statistic in Terrie's
Take: the birthrate in Japan has fallen to 1.29 births per Japanese
couple. That is a very low figure -- not enough to maintain the current
population level in the future, and so low that if extrapolated,
it will cause the Japanese population to die out in about 800 years.

Such statistics are worrying for a number of reasons: First, this
implies that in the coming years there will be fewer working people to
support the pensions of the older generation, who will outnumber the
working population. Second, the smaller working population will need
to support not only the pensions but also all the debt the Japanese
government needs to service.

It is certainly a bleak picture and could be seen as the catalyst to
a complete meltdown in Japan, with severe ramifications for the bond
market. That said, perhaps we should not write the current situation
off as a lost cause just yet.

I am really not sure what exactly drives humans to procreate, but I
am sure there is some mechanism at work that links prosperity to the
urge. Still, working against this theory is the tendency for birthrates
to fall while a country is in the process of industrialization. Perhaps
when a nation has reached a stable level of industrialization, birthrates
once again rise. It certainly appears so if the US is taken as a guide
over the past 10 years. In Japan we may still be in the
"industrialization drop;" the only thing that may turn it around is
a "prosperity bounce."

This year the average summer bonus for employees of companies who are
members of the Nippon Keidanren was $8,000 -- a record. Of course,
one bonus will not turn the tide and give us our prosperity bounce,
but it will be interesting to watch the bonuses over the next few
years and see if the birthrate responds. If nothing else it will be
an amazing opportunity to see how economics affects the birthrate in
one of the most homogeneous societies on the planet. My gut feeling
is that overall stress levels will fall with increased prosperity,
and we will see the birth rate grow.

The second issue is the pension and debt situation, which would be
exacerbated by the declining population. A new survey from Christian
Broda of the New York Federal Reserve and David Weinstein of
Columbia University entitled, "Happy News from the Dismal
Science: Reassessing Japanese Fiscal Policy and Sustainability,"
( provides us with some
hope on this subject. They conclude that Japan's debt level is

As of March 2003, the public sector gross liability was 161 percent
of GDP, but this is misleading, as it includes intra-government debt,
bonds held at the central bank and other government entities. By
netting these off, the Japan government actually owes external
entities 46 percent of GDP, and adjusted for questionable loans,
et cetera, the consolidated debts are 62 percent of GDP --
higher than America's but lower than the OECD average.

The welfare costs are obviously an issue, but as there will be
increasing spending on pensions, there will be less spending on
education and, one hopes, unemployment benefits. The current
election is focusing on the pension problem in Japan. If a
reasonable solution is found, Japan will be in a far better
position than most of graying Europe on this score.

Japan still faces a number of serious issues in the economy and, in
particular, its demographic problems and their effects on
government debt. Currently there does not appear to be a
systemic risk in the government debt market. But it will need
careful monitoring in the months and years ahead.

-- John Charles-Decourcy

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Written by John Charles-Decourcy (

Edited by J@pan Inc staff (


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