Japan Bond Activity Reflects Aging Population

July 13, 2010 (PLANSPONSOR.com) - Japan’s public pension fund sold more government bonds than it bought for the first time in nine years, underscoring concern that an aging population will make domestic investors less able to finance state borrowings, Bloomberg reports.

Economist Junko Nishioka noted that more retirees will tap their pensions as the population gets older, and the diminishing ranks of young people will find that difficult to offset. Japan has benefited from low borrowing costs because about 94% of its bonds are held by domestic investors, but the country may need to increase dependence on foreign buyers of its debt over time because of the aging population.  

The rising number of retirees and increases in pension payouts also prompts funds to dig into reserves and leaves less leeway to invest in government bonds. Reserves for national and employee pensions are estimated at 128 trillion yen as of March 2010, down from 141 trillion yen three years earlier, according to Finance Ministry data.  

The retirement of baby boomers may strain the public coffers as soon as 2012, Toshihiro Nagahama, chief economist at Dai-Ichi Life Research Institute in Tokyo, noted in an interview in May, according to Bloomberg. “That may be when Japan’s sovereign risk becomes evident,” he said.  

Bloomberg said Prime Minister Naoto Kan has been warning that Japan’s finances may collapse unless it reins in debt; however, his idea of an increase in the 5% sales tax to help pay for welfare costs for the elderly didn’t resonate with voters in a July 11 election.  

“The only way Japan can survive is to undertake fiscal rehabilitation at the same time as boosting economic growth,” said Masamichi Adachi, a senior economist at JPMorgan Chase & Co. in Tokyo, in the news report. “Japan should stop runaway budget deficits as early as possible.”