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Japan: Recovery 'at risk from pensions shortfall'

By David Ibison, Financial Times

 July 15, 2003

Tokyo - Japan's top 300 companies have pensions shortfalls totaling Y23,000bn ($196bn), independent research has calculated - a reminder of the scale of the problems that continue to hinder the country's recovery just as investors were starting to look at Japan more positively.

Daiwa Institute of Research compared the companies' pensions obligations with the value of the assets invested in their pension schemes at the end of 2002 to arrive at the figure, the equivalent of around 5 per cent of GDP.

Japan has been rediscovered by global investors in recent weeks and the benchmark Nikkei 225 index has risen around 30 per cent in the last six weeks despite the fact that there have been no changes in fundamentals. Senior Japanese politicians have stated that the rally is the result of investors regaining their faith in a recovery of corporate earnings. The Daiwa research reveals any recovery in earnings will be absorbed by future pensions liabilities.

The pensions shortfall was caused by the gap between the guaranteed returns promised to policyholders and the performance of the pension funds, which suffered as a result of the decline in the stock market. Any recovery in the fortunes of pensions would equally hinge on the performance of equity investments.

But the research forms part of the growing body of evidence that the foundations of the recent market rally in Japan are shaky and unlikely to be sustained. One market participant said: "The large European institutions have started to get out, the large US institutions were never fully in and the hedge funds are looking to go short." The global economics team at Dresdner Kleinwort Wasserstein said: "Try as we might, we can't get excited about Japan's growth prospect...Just as all the talk is of upside surprises, there are accumulating signs of a cyclical slowdown. Year on year export growth has slowed decisively in recent months as has industrial production. Lead indicators indicate the latter will continue."

Research from Goldman Sachs argued there have been no changes in Japan's fundamentals and the market's rise is a liquidity event that has little do to with foreign investors rediscovering their faith in Japan.

"Excess liquidity resulting from massive yen selling intervention by the Ministry of Finance/Bank of Japan has not been sterilized but has been parked in short term money markets," the bank said.

It added that this led to huge investments in foreign bonds by Japanese banks and Japanese institutions. Of the Y6,700bn invested in foreign bonds in April and May, Y2,500bn was made by Japanese banks.

"Dollars obtained by Japanese monetary authorities through yen-selling intervention were flowing into the US bond market via the Federal Reserve," it said. Japanese authorities spent Y4,500bn intervening between April and June, MOF figures reveal.

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