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Japan pension plan no quick boost for stocks

TOKYO: Japan's parliament on Monday began debating a major change to the country's pension system which would give wage earners greater control over their retirement nest eggs.

Like the 401(k) plan in the United States, Japan's fixed-contribution pension plan will give people the freedom to decide where to invest their retirement funds and also exempt them from paying taxes on contributions and investment earnings until the money is withdrawn, usually at retirement.

But analysts doubt the plan, expected to be introduced in January next year, will turn Japan's workers into savvy risk-taking investors any time soon.

The risk for future retirees is that retirement benefits will depend on investment returns, which is likely to keep investors away from the stock market, despite hopes that the new pension scheme will spark a further rise in Japanese equity prices.

"I think there could be an argument to say that less money will go to equities and not more," said Chris Calderwood, chief economist at Jardine Fleming Securities.

"To be honest, a lot of the risk-averse older people with the money shouldn't have massive equity weightings," he said.

SAFETY FIRST

Hopes are high that the new funding will continue to fuel the rally in Tokyo stocks that has lifted the Nikkei average more than 50 percent in the last year to a 31-month high last week.

Analysts say it will still be some time before Japanese investors take to the stock market like their US counterparts, since many were burned badly a decade ago when Japan's asset-price "bubble" burst.

Such fears could prompt many to avoid riskier investments and to place their pensions with trusted, but low-yielding, old stalwarts such as the post office savings scheme.

Many portfolios may end up looking a lot a like current corporate pension plans, analysts say.

"Full marks for the idea, but five out of 10 for implementation," said Fiachra MacCana, Head of Research at WestLB Securities, who points out that the yearly caps on contributions are too small to have a significant impact on the stock market.

Under the new plan, contributions of up to 216,000 yen ($2,000) a year are allowed for employees of companies with existing pension plans. For those without, the yearly ceiling is 432,000 yen.

Still, the fact that Japanese individuals sit on the world's largest pool of savings, some 1,200 trillion yen ($11 trillion), the increased appetite for investment returns will keep asset managers busy.

"The plan could also be a stepping stone to greater tolerance to risk," said Calderwood.

Equity trusts, similar to US mutual funds, have been sprouting up, and bookstore shelves are lined with guides on how to gather stock information and invest online using the Internet.

The financial industry is already racing to compete for the money, with the Industrial Bank of Japan and giant stockbroker Nomura Securities facing up against Bank of Tokyo-Mitsubishi and Sumitomo Bank to offer investment products.

"Whether the boom that started last year will turn out to be a temporary phenomenon or not will depend on our efforts to gain confidence from a wider range of investors," said one senior fund manager at Dai-Ichi Kangyo Asset Management.

ONE ADVANTAGE: LABOUR MOBILITY

One advantage of the new system is that it may help introduce badly needed flexibility into Japan's rigid labour market, economists say.

As Japanese companies restructure and cut payrolls as the economy pulls out of its worst recession in five decades, the new scheme allows retirement funds to be transferred when a worker switches jobs.

Economists say this will make it easier for workers to switch jobs and also hasten the demise of the traditional lifetime employment system which underpinned the rise of Japan's post-war economy.-Reuters