Japan

Japan's youth face bleak financial future as social security system nears collapse

"It is not possible to continue taking money from the pockets of future generations to pay for Japan's social security system in the present."

Mainichi,

14 August, 2012

So said Prime Minister Yoshihiko Noda during a news conference after the House of Councillors passed a consumption tax hike bill on Aug. 10. The tax hike and Noda's comments were intended to show that his administration was determined to end the Japanese government's reliance on debt issues, but to many young people already facing the promise of steadily increasing social welfare payments, Noda's words rang hollow.

The reasons for their dissatisfaction can be found in government numbers that show they will pay far more into the social security system than they will ever receive back. According to Cabinet office calculations based on a consumption tax held at the current 5 percent, a person who was 90 years old in 2005 will have drawn 19.9 million yen more in social security services than they paid in taxes and social security premiums. A person who was born in 2005, however, will pay 35 million yen more than they ever take out. A person born from this year onward, meanwhile, faces a social security system net loss of 108 million yen over their lifetime.

The reason for this gaping generational discrepancy is that the social security system has very nearly reached its breaking point.

Under the present system, those working now provide the financial resources to pay benefits to people who have retired. This system, however, requires a balance between the working population and the retired population. If this is disturbed by significant increases or decreases on either side of the generational leger, then so too is the balance of contributions and benefits.

In 1965, as the first ranks of baby boomers were hitting the workforce and the Japanese economy was growing at a phenomenal pace, there was an average of 9.1 people of working age for every pensioner, and the financial burden on workers was slight. Now, however, there are only 2.5 people of working age for every elderly person. In 2050, there will be only 1.2 people in the workforce for every elderly person, with the extreme financial burdens on the employed that implies.

To put it another way, every Japanese person born from now on could have to pay over half their lifetime income in taxes and social security contributions. If the load on workers gets too severe, "it's possible the (social security) system could not continue," one analyst told the Mainichi Shimbun.

In response, Deputy Prime Minister Katsuya Okada has said that "since elderly people also pay consumption tax, an increase in the tax rate will help shrink the generational differences" in system contributions. A senior Ministry of Finance official furthermore explained that as the elderly will also help pay for social security through the higher consumption tax, "they will be helping support the system within their own generation."

According to calculations by Dai-ichi Life Research Institute Inc. Chief Economist Hideo Kumano, people aged 60 and above account for just over 40 percent of domestic consumption, meaning they also pay a considerable portion of consumption tax revenue.

The 5 percent bump-up in the consumption tax (to 10 percent) is expected to bring in 13.5 trillion yen in new revenue. However, the social security system's load on the national treasury is expected to increase by about a trillion yen per year, with total benefits estimated to increase from 109.5 trillion yen in fiscal 2012 to 148.9 trillion yen in fiscal 2025.

The control of social security payouts is certainly an urgent task. Faced with angry resistance among the elderly, however, government discussion on combined reform of the tax and social security systems has consistently avoided consideration of methods to decrease the load on the system, such as pushing back the age of eligibility and reducing benefits for high-income earners.

If this situation continues, then Japan faces further tax hikes.

Japan's young people are demanding drastic action to rebuild the country's social security system as well as its national finances. Thus far, the political class has failed to give them an answer.

Growth predicted to weaken Weak overseas economies likely to spur slowing of nation's GDP

Yomiuri,

14 August, 2012

The nation's economy is likely to slow further in the July-September period due chiefly to the weakness of overseas economies, after a fourth consecutive quarter of growth in April to June.

According to data released Monday, Japan's real gross domestic product rose only 1.4 percent in the April-June quarter on an annualized basis, after a 5.5 percent jump in the previous quarter as Japanese companies recovered from the effects of massive floods in Thailand.

The April to June figures fell short of a median forecast of a 2.3 percent increase from 11 economic research institutes.

The slower GDP growth in the April-June period reflected sluggish personal spending due to weak sales of clothing because of bad weather, Hideo Kumano, chief economist at the Dai-ichi Life Research Institute, said.

In the quarter, personal spending, which accounts for 60 percent of Japan's GDP, grew 0.1 percent from the previous three months in real terms, against the 1.2 percent rise of January-March.

By contrast, public investment continued expanding, helped by reconstruction demand in areas devastated by the March 2011 earthquake and tsunami.

Housing investment and corporate capital expenditures rose for the first time in two quarters.

As a result, the Japanese economy continued to grow and was driven by domestic demand, which pushed up real GDP growth by 0.4 percentage point.

On the other hand, external demand, or net exports, cut 0.1 point from the growth.

External demand was weak on the back of sluggish exports to the rest of Asia and Europe, said Koya Miyamae, an economist at SMBC Nikko Securities Inc.

The Norinchukin Research Institute said the Japanese economy has already been affected by domestic policy measures running out of steam and a slowdown in the global economy.

Looking ahead, Motohisa Furukawa, state minister for economic and fiscal policy, said Monday that "as jobs and corporate earnings are projected to keep picking up, moderate economic recovery is expected to continue."

But there are concerns over the course of the economy in the second half of 2012, including the effects of the expected end of subsidies for eco-friendly vehicles and the sluggish European economy.

External demand is forecast to weaken further for some time on the back of slowdowns in the Chinese and U.S. economies. On the domestic front, there have been signs of weakness in exports and industrial production.

"With the effects of the European debt crisis spreading globally, external demand is expected to slow down further in the July-September period," Dai-ichi Life's Kumano said.

However, he said the Japanese economy is unlikely to stumble, thanks to expected growth in demand in emerging economies, such as China, and a likely recovery of the U.S. economy toward year-end.

Given strong worries about overseas economies stemming from renewed concern over European debt woes, the trend in external demand will be one of the key factors for the Japanese economy, SMBC Nikko's Miyamae said.