Japan's Public Pension: The Great Vulnerability to Deflation

Deflation since the mid-1990s has had a serious negative impact on the Japanese economy in many respects. This paper focuses on the financial vulnerability of Japan's public pension schemes to deflation. It is demonstrated in the paper that deflation made real pension benefits substantially higher than originally planned, and thus considerably worsened the financial conditions of the country's public pension schemes. This development also has serious implications for intergenerational distribution, since the younger and future generations need to bear the costs of these higher pension benefits at a later stage. Needless to say, ending deflation is a top priority, but at the same time it is imperative to improve Japan's public pension schemes to avoid being financially impaired by deflation.