Ex-BOJ member says government must allay pension jitters before Japan can reflate economy

Dr. Sayuri Shirai, Professor at Keio University and former BOJ Policy Board member

Dr. Sayuri Shirai, Professor at Keio University and former BOJ Policy Board member

First published by The Japan Times

Former Bank of Japan Policy Board member Sayuri Shirai says the central bank has done about all it can do to end the nation’s deflationary mindset.

More than four years ago it unleashed massive monetary easing, but taxpayers still doggedly save, fearing that public pensions won’t provide enough for their retirement. The government must build public trust in its ability to safeguard public pensions, Shirai says.

Now a professor at Keio University, Shirai was one of nine board members who helped decide monetary policy between 2011 and 2016, a time when the BOJ engaged in the greatest monetary experiment in central banking history. She served Govs. Masaaki Shirakawa and Haruhiko Kuroda as the only female board member at the time and was the third to have ever held the role.

According to Shirai, massive monetary easing was not effective in raising inflation and aggregate demand over the public’s concern about the social security system — especially public pensions.

“People think it’s not financially sustainable,” she says. “The young working-age generation saves a lot. They are doing this because they don’t trust the pension and insurance systems.”

They have good reason to worry. Social entitlement systems were designed after World War II during a time of rapid economic growth and when life expectancy was much shorter than it is today.

The plans work on the principle that benefits received by current retirees are funded by a younger generation of taxpaying workers. These systems are sustainable so long as the working population grows faster than the population of retirees. But Japan’s graying society and rapidly declining workforce are putting a heavy burden on the current pension system.

Workers are aware that there won’t be enough young taxpayers to pay their future pension and health care costs in retirement. Today there are 2.5 workers for every pensioner. The ratio is projected to fall to 1.5 by 2040 and to 1 by 2060.

Entitlements already consume one-third of the national budget and are growing by 1 percent annually. They are set to skyrocket by 2025, when all baby boomers will be 75 years or older.

Ironically, those who can least afford the cost of entitlements bear the heaviest burden. The elderly own more than two-thirds of all household net financial assets, while people below the age of 40 hold only 2.5 percent. As a result, younger adults live with their parents for longer periods, delay raising families and spend cautiously.

In a bid to end the deflationary vicious cycle, Prime Minister Shinzo Abe unleashed the “three arrows” of his economic plan at the start of his second term in December 2012.

The BOJ bought up huge amounts of Japanese government bonds, exchange-traded funds and risky assets. Through massive monetary easing, the central bank aimed to lower bank lending rates, reflate the economy and achieve sustainable growth.

After the central bank introduced negative interest rates in January 2016, financial institutions complained that this move would undermine their profitability. Nine months later the BOJ reversed course by introducing its yield-curve control policy.

“The September policy announcement was merely the BOJ’s acknowledgment that they had made a mistake by introducing negative interest rates,” Shirai says. It was also an admission that the central bank had done almost everything it could to increase aggregate demand.

Shirai believes the government must now put social security reform squarely on the political agenda.

“We have always talked about how to make the social security system sustainable in the past. There are many proposals, but people stopped discussing it,” she says, suggesting the government now introduce comprehensive entitlement reform.

A partial solution, such as a consumption tax hike, is unlikely to alleviate fears. A comprehensive solution might include raising the consumption tax, implementing massive spending reforms and increasing the retirement age. It might also include introducing a funded or partially funded contribution-style public pension system.

Shirai thought “it was best to use fiscal policy to improve the social security system,” recognizing the costs of making reforms were huge.

“If you’re going to spend public money — helicopter money — it has to be used to make the social security system more sustainable,” she says. “Otherwise, no matter what the government does — either cutting tax or increasing expenditure — people will not get rid of fear.”

Either way, it is now up to government to regain public confidence in its ability to safeguard people’s pensions and to reflate the economy. “The BOJ has done enough. I think it is now for government to deal with the fear,” she says.

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