SocGen On Why Japan's Plunging Pension Reserves May "Cause Havoc" To The Japanese Bond Market

Tyler Durden's picture

A month ago, we reported that the Japanese public pension fund, which holds JPY152 trillion in total reserves, would for the first time withdraw 6.4 trillion yen in order to cover pension payouts, a process which once started, eventually ends up with the "Illinois" conclusion where it has to issue bonds to pay accrued pension obligations. The reason why the Japanese pension fund is particularly important for japan is that not only does it have implications for the welfare system of the land of the rising sun, any future dispositions will explicitly affect the supply and demand of JGBs, of which pension funds have traditionally been a major buyer. Not only that, but as Dylan Grice reminded us some time ago, a liquidation process would also impair US Treasury holdings: " As Japan's retirees age and run
down their wealth, Japan's policymakers will be forced to sell assets,
including US Treasuries currently worth $750bn, or Y70 trillion "eight
months" worth of domestic financing
." Today, another SocGen analyst, Takuji Okubo, presents a realistic outlook of what will happen when one takes government projections to the pension system and applies realistic assumptions. In a nutshell, instead of a build up of JPY100 trillion over the next 15 years, pension reserves will likely decline by JPY36 trillion, a swing of almost 140 trillion, or nearly $2 trillion in incremental and very marginal JGB and treasury demand actually becoming supply. And in a world in which the Fed is suddenly (allegedly) pulling out as the biggest source of sovereign paper demand, this swing factor out of Japan will have substantial implications for the bond market, especially when coupled with a Japanese economy that suddenly finds itself on the rocks.

Below we present Okubo's full note as it is a must read for everyone who still refuses to acknowledge the extremely material role of Japan in the global financial jigsaw puzzle.

Japan’s declining pension reserves

At the end of June, the Japanese government is scheduled to announce reform measures on Japan’s public pension system. No significant measures are likely to be included to improve the sustainability of the pension system this time. That is worrying, as pension reserves have already started to shrink, and the trend could accelerate. As pension funds play an important role in the JGB market, developments in public pension finance deserve  close attention.

Government to propose pension reform in June

With an aging society, public pension is increasingly becoming the dominant element in Japan’s public finance. In recent years, Japan’s public pension system distributed close to JPY 50 trillion, equivalent to nearly 10% of GDP, as pension benefits. As of now, gross public pension benefits in Japan are comparable to those in Europe as a ratio to GDP. However, with further aging in the population, the size of pension benefits in Japan is likely to increase. Populations aged over 65 in Japan are projected to increase from 29.4 million in 2010 to 35.9 million in 2020. Japan’s public pension system is only partially funded, and there have been constant concerns over the sustainability of the public pension system.

Prime Minister Kan pledged at the beginning of 2011 that he would propose by the end of June a mix of reform proposals for social security, including public pension. He created a commission to provide him with proposals for reforms. The commission halted its meeting schedule in the aftermath of the earthquake, but it recently resumed its discussion.

Judging from the minutes of the commission, the commission does not seem to be making much progress though. In fact, the commission’s proposals to Prime Minister Kan could worsen, rather than improve, the sustainability of the public pension scheme. The commission is discussing expansive measures such as an increase in the pension level for lower income earners, while making little progress on measures to increase revenue or to cut benefits.

Official projection on pension finance is far too optimistic That is worrying, because we think the pension reserves would critically decline unless measures are taken either to increase revenue or to cut pension payouts. As of 2010, the public pension has JPY 152 trillion of reserves, over 30% to GDP, the majority of which is invested in JGB. According to government’s projections last made in 2009, pension reserves are projected to increase. However, the projection is made on excessively optimistic assumption.

For example, the Japanese government’s projection assumes the long-term average wage growth rate of 2.5% and investment yield of 4.1%. Both numbers seem excessively optimistic. When we replace the long-term wage growth rate to 1% and investment yield to 3%, we project reserves to decline from JPY 152 trillion in 2010 to JPY 116 trillion in 2025 (see chart below). Given the critical role the public pension fund plays in supporting the longer end of the JGB market, we suspect that such a decline in the public pension reserves would cause havoc to the JGB market at some point.

Painful reform needed to keep reserves from declining

Given that the total JGB outstanding will likely keep expanding for the foreseeable future, reforms must be taken to keep pension reserves from declining. What could these reforms be? For example, housewives and house husbands (although the latter is still rare in Japan) are currently exempt from paying a premium into the national pension system. That needs to be changed. Raising the starting age on when a person can receive pension benefits should also be on the agenda. In our view, the balance of the adjustments needed mostly fall on the revenue enhancement measures, as the level of pension benefits in Japan is not particularly high. Prime Minister Kan is unlikely to deliver these reforms. However, as reforms are delayed, the reserves would keep declining. In our view, JGB market participants need to keep a much closer eye on the speed of decline in the pension reserves and the speed of reform implementation in pension finance.

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lettuce's picture

this is going to be one of these slow motion trainwrecks... ah the poor demographic has finally caught up. maybe they should try to manipulate some WTI futures/physicals to go ahead and "add income" to the fund's bottom line.

tgatliff's picture

What???  Ben burps $750B in Treasuries when he sleeps at night... Heck, he almost bought that much in QE2, which didnt even last 1 years time.   By the time QE18 comes around, $750B in Treasuries wont buy you cup of coffee at starbucks...  

Chump change...


silberblick's picture

Click below to see a visual graph of Bankster's dirty needs arranged according to Abraham Maslow's hierarchy of needs:

bigelkhorn's picture

Best comment I have seen in in here all day. Alot of people think we are doomed, but there are still great ways to make money. Even while the economy is collapsing around us.

I subscribe to the guy from australia and his FFT economic newsletter at  that guy has called many big events before they have happend, including the stock market crash in 2008 and the current financial collapse of the US. (currently happening) I found him from a friend last year, and he has some important work.

His oil calls are insane, and I have been making good money with them. He is well worth a look, if you want to keep two steps ahead of the sheeple out there.

I am worried about my financial future. Is anyone else nervous out there?

Dejean Splicer's picture

"Both numbers seem excessively optimistic."

Why does everything out of Japan seem overly optimistic and existentially impossible?

It was once a beautiful country. Outside the big cities.

lettuce's picture

slightly related but mainly not -- i was having a conversation with friends today about how the gas meters on japanese cars are overly optimistic. anyone that has driven a camry past the 1/4 tank mark knows that at this level you are forced on an urgent search for the nearest fillup...

Rodent Freikorps's picture

Japanese can get less xenophobic, or fail. It is that simple since they don't want to produce enough babies to fund the ponzi.

We need a new term for when a population bomb in a socialist idiocracy is approaching.

How about Ponzitis?

Dejean Splicer's picture

Good point. Vaginal pain exceeded by financial pain? Or has the population awakened?

I find that hard to believe. An awakening. All tap water drinking Japanese peoples consume fluoride. So do the Chinese now-days...

Scary how that shit hypnotizes you. Servile drones, but something deep within has stopped the urge to breed. Or is it something else chemically suppressing the urge?

tgatliff's picture

One moment we all panic that there is not enough oil left with the global growth ahead of is.  Next, its that the human civilization is at risk because we are not having enough babies..


Personally, I think that pensions and birth rates are the least of japans concerns at the moment.  I would assume that the fear of Japan glowing in the dark probably is a little more pressing issue at the moment.  In my opinion, talking about pensions is simply a distraction for coming the realization that the island of your forefathers is basically becoming unlivable for the next 300 years due to careless decisions of your own.

penisouraus erecti's picture

I like money........yeah, I like money though, can't believe you like money too

Lot's of tards livin kick ass lives out there

Great movie. Only thing I've seen recently that reminds me more of our idiocracy is the tv show Trailer Park Boys. 


IdioTsincracY's picture

Why worry about pension reserves?

increase productivity ... let them work until the very end ... who needs retirement!

Also ... in order to be competitive, lower wages down to third world level....

see problem solved ... deficits turned into surpluses!


Newsboy's picture

We need to watch closely what Japan does, because we are all on this same track. Unlike The US and the EU, the Japanese can cooperate selflessly in times of extreme need. They will show us how it can be done. It will not be possible to do it within the present financial structure.

VyseLegendaire's picture

Stupid conceited Nippon thinking their ponzi oligarchy won't ruin the prospects for their children.  Laugh!

Newsboy's picture

oops duplicate

kushmere's picture

If I was the Japanese Govt I would not be worried. Radiation sickness is probably going to negate a lot of future fund drawees.

Robslob's picture

Certainly explains why Gold and Silver have the end they may be the only real money left...

in4mayshun's picture

On the topic of Japan, went to my local Nissan dealership to get my vehicle serviced. Salesman told me they are out of Versa's, Cube's, and running low on Sentra's with no word on when production will restart. 

Are the dominoes starting to fall?

Belrev's picture

Only an evil or foolish person would say that Japan has a demographic problem. It does not. Everyone is Japanese in Japan. USA on the other hand and Europe do have huge demographic problems with so many non-white savages inundating their countries and destroying their ethnic fabric. Crime, filth, corruption as an added "cultural enrichment" go with it.

Rodent Freikorps's picture

That's a joke, right?

If not, enjoy your dying.

Who do you think will inherit the home islands when you are all gone?

The world will only miss the JPop babes. The rest can walk into the sea tomorrow and we wouldn't notice.

trav7777's picture

africans are finally going to invent the sailboat after 2000 years and sail there?

High Plains Drifter's picture

this is probably one reason why japan has been taken out. they simply did not want to dance to the nwo tune......

trav7777's picture

Japan wasn't "taken out" you moonbat nutjob.  It was an earthquake.  A NATURAL disaster

Hephasteus's picture

Combined disaster is japan.

Planet hail-bob is the rapture crowd and will morph into the comet ella. Then they'll morph into paranoids and make it just a bitch to get away with anything. What happens to illogical beliefers when you take it away. The mothership is coming to take us oct 15 2008 times a million. Government will probably have to wear buttplugs to keep these people from crawling up their ass with a microscope and psychology/physics/biology textbooks.

The Waco clock tower in ginza and it tells the date of when the combined disaster hit.

Korrath's picture

Maybe these pension funds should start massively investing in gold right fucking now ( or wait to see if there's a better entry level after the possible QE2 end crash ) so as to remain solvent at a later date.  


Of course, this is just advice from yet another silly gaijin, so ignore it as you please, Nihonjin.

baby_BLYTHE's picture

Wait till all this inflation we exported to Japan, China and the rest of the BRICs comes home to roost! 

Ben's and the rest of the Govt intervention will unravel so quick, they will quickly forget the phrase "We were saved from another great depression" that they attempted to burn into the greater populations' brains

Sock Puppet's picture

Another Trav7777 employee?  Expert on everything all of a sudden.  I rember when you were you a little college freshman who stumbled across this website. Whatever.

baby_BLYTHE's picture

wrong! junk

I have been reading ZH longer than you (little over two years now)...

Not that it matters, just tell me where I am incorrect... you think interest rates will stay in 'negative real' territory while inflation explodes to the upside?

The FED is backed into the corner. They have chosen INFLATION. They won't do QE 3 right away, just like they held back on QE 2. but it will come soon after.

You will soon see 14% inflation in America. The FED criminal number will be 2.4- 2.9%, but real inflation will be well into double-digits. It will be during this time foreign countries offically begin dumping dollars... 

... then interest rates SPIKE! the FED is the only one left. 
Congress won't let people die... QE 18 (just like Marc Faber + Jimmy Rogers have pointed out).

Sock Puppet's picture

Supposedly you are a college freshman which means you wouldn't have ever heard of Blythe for starters.  I remember one of your first posts about how you had $200 of gold and you didn't if you should keep it or sell it and all the other supposedly niave BS.  I'll bet your some dude with hairy nuts drinking cofee on the night shift in Trav7777's office.

baby_BLYTHE's picture


I have been called Blythe since I was in junior high. This was due to the fact I listened to heavy metal and hardcore punk during my latter adolscene all the way through my teens till today.

By the time I got to high school I was actively involved and even touring with indy metal artists in the underground scene as a promoter and merch girl. I still do this today. SOme of the artists are major acts, a few of you might even recognize.  

I am going into my Junior year officially but only because I am involved in a work/study program... due to the fact I travel about 7 months out of the year.

I have been accumulating precious metals ever since I started reading ZH and still haven't sold any.

I turn 21 in July but, seriously, When did age matter on this site?

kind regards

Sock Puppet's picture

Just admit it you are a government Troll.  I don't personally care, as I just follow this site as a hobby, but I know bullshit when I smell it.  Your picture and the persona you have tried to develop are like a CIA honeypot.  You lure the men with your beauty and innocence and then call for revolution.  It is obvious you are bait to find those with a bent for violence.  Just admit you got some small hairy nuts, hair on your back and an Adam's apple and then start over with a new persona.  Best of luck.

baby_BLYTHE's picture

Reality is sometimes tough to deal with, I understand.

I don't feel like arguing with someone that is just going to throw out insults, falsehoods and ad-hominem character assignations. This is ZH, I come here to learn, listen and debate Economics and GEO Politics.

So I conclude with the same, Good luck sir in all your current and future endeavors.

Sock Puppet's picture

Sure goldbug.  Whats with the ad-hominen BS, don't you call for revolution against the United States Government?  That would be treason.  Your fake, just admit it.

Hephasteus's picture

I think you missed there. She's not fake. She's young and freaks out more than most people and hasn't had enough experience to see as much as other people. But she's not a troll.

Sock Puppet's picture

Shows how good she is, she suckered you with her BS too.  She is playing the innocence card and then says let crack open some fuckin heads.  She is bait for the revolutionary violent types, she or he probably works for the dept of homeland security.  I know it is probably unamerican of me to call out a fellow patriot but they can go troll elsewhere.

baby_BLYTHE's picture

The answer to 1984 is 1776

When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature's God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.


Treason? Hardly. I just happen to believe in what this country stood for on day 1. We have since turned a 180. I simply wish to restore the republic back to its orginal intent. i.e. No overseas military empire, no Federal Reserve, no Income Tax, full civil liberties, etc.

Goodnight, regards

Sock Puppet's picture

No income tax is Treason.  Look I know you are a true patriot, I am just calling out your bullshit.  Your going to have start over from scratch here to stir the pot and coax out the violent.

As your quote says, disolve the political bands, doesn't mean fuckin revolution it means through political means.

Sock Puppet's picture

By the way, you are very polite for being a punk rocker.

Sock Puppet's picture

Again, you are very niave if you think we are not going to try to maintian our Empire, who the fuck would defend us against China, Russia and the Muslim Extremists.  Didn't you hear your boss' comments (Panetta) the other day?  We must do eveything possible to maintain our world power/military position.  Good luck with an almost college junior calling for the end to our over seas military empire.

Hephasteus's picture

Again. Young. When you face something conflicting you have 2 choices. Fight or Flight. She went suicidal a few days ago. That's flight. Now she's trying fight.

There's no pot to stir besides the real trolls who are easily outed.
And our overseas empire is falling. Sure as the dollar. Doesn't matter if the euro or other currencies take some heat off it for a while. It's all coming back to the dollar and it's going down harder than it ever has.

Sock Puppet's picture

If you say so boss.  See what she posted on another thread?


by Sock Puppet 
on Wed, 05/25/2011 - 02:13


by baby_BLYTHE 
on Wed, 05/25/2011 - 01:53


ur ISP called. they know what your up to.


 You governmant types like to get personal.  I thought you were all about the constitution and civil liberties like privacy.  I guess only when is suits your message.




Clay Hill's picture

If you're that creeped out by the young lady, just pay for an anonymizer program, or use 

If you're worried about your search history, use

Whatever you do, stop with the trolololololololololololo bullshit, it was only funny the first 5,000,000 times.


Sock Puppet's picture

Again, I am not creeped out. I find it interesting she denies being a troll vehemently on one thread and threatens me with "Your ISP knows what your are doing" on another thread.  It calls her credibility into question.  Again I know what her/his mission is at the dept of homeland security to find and draw in the violent types.  I just don't think ZH is a good spot to try and stir the pot. 

Que Sera, Sera (Whatever Will Be, Will Be)"

Clay Hill's picture

"I just don't think ZH is a good spot to try and stir the pot."

Good, now go away.