Strengthening Employment-Based Pensions in Japan

We investigate how the Japanese pension market for funded employment-based pensions is changing and how it might be strengthened in order to better serve one of the most rapidly aging populations in the world. Public and private pensions in Japan are estimated to hold around US$3 trillion, making that system the second largest globally after the United States. However, unfavorable economic developments have cut sharply cut into asset values, and the weak economy is undermining traditional lifetime employment contracts. Recent legislation permitting the establishment of defined contribution plans in Japan may provide new employer-sponsored retirement plan opportunities. We first describe the Japanese pension system at the end of the 20th century and provide an overview and evaluation of the changes in the pension arena emerging from the 2001 legislation. Next we show that important design questions remain to be answered, if Japanese employment-based pensions are to be reformed and modernized. Finally we indicate lessons gleaned from recent changes in US pension plans.