{"id":63262,"date":"2026-07-16T17:23:25","date_gmt":"2026-07-16T07:23:25","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=63262"},"modified":"2026-07-16T17:23:25","modified_gmt":"2026-07-16T07:23:25","slug":"proposed-pension-reform-in-japan-and-elsewhere-misses-the-point","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=63262","title":{"rendered":"Proposed pension reform in Japan (and elsewhere) misses the point"},"content":{"rendered":"

Earlier this year, I analysed how decisions taken by the Japanese Government Pension Investment Fund to speculate in global financial markets have played a significant role in the depreciation of the yen. In this blog post – Japan\u2019s Government Pension Investment Fund and the yen \u2013 mainstream macro myths driving bad policy<\/a> (February 2, 2026) – I demonstrated how massive quantities of workers’ savings held by the GPIF are being channelled into the private, for-profit investment banks and hedge funds, which deliver huge profits to these financial market players. Moroever the GPIF has shifted its investment portfolio significantly towards foreign bonds and shares post 2010, which has seen the GPIF selling large tranches of yen and adding to the excess supply in foreign exchange markets. The Japanese Finance Minister is now pressuring the GPIF to reallocate its portfolio into domestic assets to boost the domestic growth rate. A similar trend is happening in the UK and Australia. What does it mean? The conclusion lets you see they the proposals miss the point.
\n<\/p>\n

As Background reading, the blog post cited in the Introduction is useful because it details the pension system in Japan.<\/p>\n

The pension funds in Japan hold around \u00a5320 trillion ($US2 trillion) in assets and the system is dominated by the GPIF holdings at around \u00a5290 trillion.<\/p>\n

The large pension funds in Japan in order of assets held are:<\/p>\n

1. GPIF – public fund (\u00a5290 trillion) – this is the largest pension fund in the world.<\/p>\n

2. Pension Fund Association for Local Government Officials (PAL) or Chikyoren – public fund (\u00a538 trillion).<\/p>\n

3. the Pension Fund Association (PFA) – public fund (\u00a512.9 trillion).<\/p>\n

4. The Federation of National Public Service Personnel Mutual Aid Associations (KKR\/Kokkyoren) – public fund (\u00a511.5 trillion).<\/p>\n

When the Japanese Finance Minister outlined his plan for the GPIF to ‘buy Japanese’ on July 10, 2026, the yen jumped in value because if the plan proves successful, there will be a sell-off of foreign currencies in exchange for yen.<\/p>\n

This issue has come to the surface as a result of Ms Takaichi’s growth plan, which is to be based on a foundation of strong private and public investment in the domestic economy as the growth engine.<\/p>\n

Public investment relative to GDP has been flat over the last two decades (currently around 4.7 per cent).<\/p>\n

In the period immediately after the asset bubble burst in the early 1990s, that ratio was at times over 10 per cent and was a classic stimulus move in the context of a decline in the private investment ratio.<\/p>\n

The private ratio fell from around 18 per cent in the mid-1990s to a low of 14.5 per cent in the September-quarter 2010.<\/p>\n

It has recovered somewhat in recent years and in the March-quarter 2026 it had risen to 18 per cent.<\/p>\n

The Japanese government has been trying to pressure the corporations to release their massive stock of cash reserves (accumulated after years of low investment) into new productive capacity and plan to stimulate that process by engaging in a massive public investment boost.<\/p>\n

They also realise that the GPIF has significant assets and have been exploiting the flexibility in their Charter to shift funds offshore.<\/p>\n

Voluntary constrained enshrined in the legal structure governing the operations of the GPIF means that the allocation of its investments – which is split equally between domestic bonds, foreign bonds, domestic shares, and foreign shares – can only be changed every five years after review.<\/p>\n

The last review was in 2025.<\/p>\n

So apart from a legislative overhaul (unlikely) how can the Finance Minister achieve his objectives?<\/p>\n

1. The voluntary constraints are somewhat loose – the 25 per cent guidance can be varied plus and minus 6 per cent, which is one of the ways the GPIF has been chasing higher returns in foreign currency assets.<\/p>\n

Thus, funds could be reallocated immediately with no underlying change in the GPIF’s legislated charter.<\/p>\n

2. Within the Charter is an allowance for so-called ‘alternative assets’ equal to 5 per cent, but is currently only holding 1.7 per cent of those assets in its total (as of March 2026).<\/p>\n

In other words, if the Minister can persuade the GPIF to shift their allocation to 5 per cent, then it would provide a significant investment boost to the domestic economy.<\/p>\n

3. There is scope (of course there is) for the Minister of Health, Labour and Welfare, which administers the GPIF, to require a formal allocation shift towards domestic assets within the five-year review window.<\/p>\n

The important point about Japan’s public pension system is that it operates on a ‘modified pay-as-you-go’ basis rather than on a ‘fully funded’ basis.<\/p>\n

The latter system means that each generation of workers has to accumulate and invest their own contribution to cover future payouts.<\/p>\n

The ‘pay-as-you-go’ system means that the current generation of workers contributions are used to pay the benefits of the current retired cohort.<\/p>\n

There have been a lot of criticisms of Japan’s ‘pay-as-you-go’ system because it is highly sensitive (under current procedures and ideologies) to demographic shifts.<\/p>\n

As Japan’s population ages (and they have a long life expectancy) the group of workers paying into the system to provide the funding for those receiving the benefits shrinks and the mainstream debate is about solvency and excessive burdens on younger workers, the latter which are increasingly shoehorned into non-regular and low-paid work (the casual or gig economy).<\/p>\n

However, the downside of the alternative (fully funded) is that if there is a major downturn in the financial markets where the savings of the current generation are invested, then their pension possibilities can shrink dramatically as the funds make losses.<\/p>\n

The modified system in Japan emerged in 2004 when the government introduced significant reforms to the pension system.<\/p>\n

One of features of the modified system is that the Basic component (the so-called Kokumin Nenkin) is 50 per cent subsidised by the Ministry of Finance which reduces the need to raise as much from contributions of the current generation of workers.<\/p>\n

While mainstream economists are always claiming the pension system is unsustainable (due to the demographic shifts), the reality is that the government can maintain pensions at any level they want by varying the per cent that they subsidise the Kokumin Nenkin, including totally funding the scheme (see below).<\/p>\n

The other point about the ‘pay-as-you-go’ system is that the relevant pension fund only needs liquidity equal to the annual benefit payments for the current group of recipients.<\/p>\n

But after the defeat in WW2, Japan’s demography was very supportive of the strong growth that emerged from the 1950s up to the crash in the 1990s.<\/p>\n

The dependency ratio (ratio of those dependent to those of working age) was very low and Japan exploited the so-called ‘Japanese demographic dividend’ to become the second largest economy in the world (until the GFC in 2010).<\/p>\n

The upshot is that the GPIF accumulated massive stocks of worker contributions now equal to around 43 per cent of GDP.<\/p>\n

The Chikyoren holds assets equal to 4.6 per cent of GDP, while the PFA 1.9 per cent, and the KKR 2.6 per cent.<\/p>\n

Further, the private Corporate Defined Benefit and Defined Contribution Plans have assets equal to around 14.7 per cent of GDP.<\/p>\n

In total, the total pension to GDP ratio in Japan is about 68 per cent, which is a significant excess on the liquidity needed to cover each year’s requirements for pensions.<\/p>\n

Much of that surplus is held by the government.<\/p>\n

Think about that.<\/p>\n

Every five years, the Ministry of Health, Labour and Welfare conduct the – \u5c06\u6765\u306e\u516c\u7684\u5e74\u91d1\u306e\u8ca1\u653f\u898b\u901a\u3057\u8ca1\u653f \u8a3c<\/a> (Future financial outlook for public pension funds or financial verification) – which simulates how long the current asset base of the pension system can stay in excess.<\/p>\n

The baseline simulation uses actuarial modeling over a 100-year horizon to evaluate cash reserves, payout ratios, and investment returns.<\/p>\n

The most recent exercise (2025) found that even with low (non-zero) GDP growth, and the funds receiving a low return, the pension system continue to have sufficient reserves indefinitely.<\/p>\n

The Government knows that even with current procedures the public pension funds could just invest the savings in long-term Japanese government bonds and have sufficient reserves.<\/p>\n

This is the motivation for the current proposal to shift the fund’s assets into domestic investments, particularly JGBs which, according to mainstream logic, would then fund the long-term investment plan that Ms Takaichi is proposing.<\/p>\n

In other words, even within the mainstream debate, there is little likelihood that the bond markets will ‘dry up’ and thwart the Government’s growth strategy.<\/p>\n

The Financial Verification process calculates the \u7a4d\u7acb\u6bd4\u7387 (Reserve Ratio), which is the total value of the pension reserve funds at the end of the previous fiscal year divided by the current year\u2019s total annual benefit payments<\/p>\n

In 2024, this ratio was around 7.4 years.<\/p>\n

After the process was completed, it was reported that under the plausible ‘transition-to-growth’ simulation (assuming 1 per cent growth), the ratio was rise to at least 9 by the mid-2030s and further to over 10 by 2120.<\/p>\n

In other words, the capital reserves of the system would never have to be depleted over the next 100 years to pay for benefits each year.<\/p>\n

What emerges from this discussion is that the current pension contribution rate by workers to the public funds is excessive in the light of modest to zero real wages growth and reducing those contributions would free up purchasing power to allow household consumption expenditure to rise.<\/p>\n

Putting all this together makes for an interesting insight.<\/p>\n

Given that the public funds have such large surpluses that are not required to cover any immediate liabilities (the annual pension payments), these funds could be diverted into infrastructure spending in housing, health care, education, transport etc to expand well-being.<\/p>\n

The current regulations that have led to these huge financial surpluses clearly have pushed worker savings into speculative assets that have not advanced community well-being as much as the alternative uses would.<\/p>\n

Given they have also been a significant factor in the yen slide (which has impacted on the cost-of-living pressures), diverting the excess reserves into productive domestic projects would also be beneficial.<\/p>\n

But take a further step back and you realise all of this debate is really based on a series of assumptions that are inventions of mainstream economists rather than reflecting what is actually possible.<\/p>\n

Remember, in 2004, the Japanese government changed the laws surrounding the Kokumin Nenkin (basis pension) so that it was obliged to cover exactly 50 per cent of the fund’s responsibilities.<\/p>\n

Between 2004 and 2009, the government funded about one-third of the flat-rate basic pension benefits.<\/p>\n

After 2009, it reached the 50 per cent requirement.<\/p>\n

Much of the shift in GPIF portfolio, which is now causing the yen to depreciate further, came from the mainstream economic fictions that the ageing society would ultimately mean the Japanese government would not be able to afford to cover the pension entitlements as the proportion of workers dependent on it rose relative to those contributing to it (a rising dependency ratio.<\/p>\n

It was decided that to ensure there was enough \u2018yen\u2019 available to provide pension benefits over the long-term that the reserves in the system (via the contributory scheme) should be invested in \u2018diversified markets\u2019.<\/p>\n

The option was to just keep them in \u2018government accounts\u2019, which were considered to be offering inferior returns.<\/p>\n

The logic was that the GPIF would have to generate financial returns in order to remain solvent in the long-term.<\/p>\n

So think about the sequence:<\/p>\n

1. Workers have to sacrifice some of their income \u2013 over a period where wages growth has been very low and real wages have been eroded to contribute to a \u2018fund\u2019.<\/p>\n

2. The \u2018fund\u2019 then uses the workers\u2019 contributions to speculate in financial markets.<\/p>\n

3. And, along the way enriches the coffers of various global hedge funds and investment banks.<\/p>\n

All because the myth that the Japanese government, which issues the currency, would run out of that currency and the aged pension system would collapse.<\/p>\n

Poor starting assumptions leading to worse outcomes.<\/p>\n

Now the wheel is turning again and it clear that pressure is to reduce the diversity and shift those funds into local investments such as JGBs.<\/p>\n

This has two implications even in mainstream thinking:<\/p>\n

1. As above, the pension system could divert all its funds into JGBs and have plenty of reserves to meet projected annual benefits.<\/p>\n

2. And, the bond market would never run out of investors.<\/p>\n

Conclusion<\/h2>\n

But an even more sensible option would be to reduce the workers’ contributions to zero, divert the reserves (steadily) into meeting the many challenges of the nation in infrastructure, housing, energy, transport, health care etc, and then paying the annual pension benefits as part of the annual fiscal process.<\/p>\n

That is enough for today!<\/p>\n

(c) Copyright 2026 William Mitchell. All Rights Reserved.<\/p>\n","protected":false},"excerpt":{"rendered":"

Earlier this year, I analysed how decisions taken by the Japanese Government Pension Investment Fund to speculate in global financial markets have played a significant role in the depreciation of the yen. In this blog post – Japan\u2019s Government Pension Investment Fund and the yen \u2013 mainstream macro myths driving bad policy (February 2, 2026)…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[31],"tags":[],"class_list":["post-63262","post","type-post","status-publish","format-standard","hentry","category-japan","entry","no-media"],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/posts\/63262","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=63262"}],"version-history":[{"count":0,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/posts\/63262\/revisions"}],"wp:attachment":[{"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=63262"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=63262"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=63262"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}