The Japanese finally are entering the modern world of private pension financing, involving transparent accounting and substantial pre-funding of benefits.
There's an irony in Japan's new direction -- this is a country that a decade ago was seen as a model for economic achievement for the United States and the world by many academics, politicians and business leaders.
For the first time, Japanese corporations have to disclose their total pension liabilities. This recognition is something U.S. corporations have done for almost 15 years, since the adoption of Financial Accounting Statement 87.
The move will have many implications for Japan, all positive in the long term. In the short term, it will leave many companies, we hope temporarily, in a sea of red ink as they recognize their huge pension liabilities. Disclosure will present a more realistic picture of a Japanese company's obligations, allowing them to be targeted and ultimately leading to a more efficient allocation of corporate capital as companies bring these liabilities under control.
That could have a keen influence on other areas of Japanese business. One reason for the protracted poor economy in Japan -- its Nikkei stock market index is at less than half of its 1989 level -- is the lack of transparency in some areas, and the failure to recognize some major economic problems.
Some big banks, for instance, still have not fully written down poorly performing real estate debt and assets. The Japanese economy will never fully rebound until these issues are recognized and resolved.
The Japanese economy was never as successful as cheerleaders portrayed it in the 1980s. Some good ideas widely in use today, such as just-in-time inventory sourcing, came out of it. These ideas were celebrated by proponents of the Japanese new economic model, overinflating its achievements.
But these proponents downplayed underlying peculiarities of the economy. For example, domestic oligopolies and other non-competitive restrictions ultimately damaged the high-flying economy. The otherwise technologically savvy Japanese were backward in the asset management business, including performance measurement, asset allocation and money management competition.
The new accounting rule requires companies to report their pension underfunding on their balance sheets and their pension expenses in their income statements. Pension liabilities totaled some 60 trillion, or $550 billion, according to a Daiwa Institute of Research estimate for 1997 cited in a Pensions & Investments report on the new accounting rule.
The recognition of pension liabilities is a step toward improving retirement financing. They will have to be funded. The move could hurt stock prices briefly as companies divert financing from operations and development to servicing liabilities. But greater capital flows from companies into pension funds, and from those funds through money management firms into the capital markets, will provide long-term capital for other businesses, and help to improve the entire economy.