The 20 Million Yen Problem in Japan

What is the 20 Million Yen Problem?
The ’20 million yen problem’ for retirement funds is a warning raised by the Japanese government in 2019, specifically by former Finance Minister Taro Aso . The issue highlights the lack of adequate funds for retirees in Japan , stating that families would need to save at least 20 million yen in addition to their national pensions to live adequately in retirement . The ’20 million yen problem’ has become a catalyst for hard-working people to invest in financial markets in Japan and abroad.

The main reasons for the lack of adequate funds in Japan are:

• Lack of historically high-performing retirement plans .
• An aging population .
• 0% interest on cash at banks (negative real interest rates).
• Reducing lifetime employment in large corporations.

Japan has struggled with stock investments for the past 30 years , suffering two lost decades since the economic bubble burst in 1989. Therefore, Japanese people are often reluctant to invest their hard-earned money in the stock markets . despite the relatively decent performance from 2009 to 2021.

Additionally, Japan has the oldest population in the world , with a third of its population aged 60 or older. This trend is not projected to slow down anytime soon, as estimates suggest that up to 42 percent of Japan’s population will be 60 years old or older by 2050 . Japan’s demographic problems have decreased the size of its workforce and strained its vital factors of production, contributing to declining national productivity. These factors increase the length of time a retiree must fund their golden years, especially for women. According to the Ministry of Health, Labor and Welfare, average life expectancy in Japan reached all-time highs for both women and men in 2020, at 88 years and 82 years respectively.

To make matters worse, the conservative mentality of the Japanese has discouraged them from putting money into the stock market . Therefore, the money stays in the bank without any interest. As a result, the net cash return is negative after accounting for inflation, which is over 2% in Japan.

Finally, large corporations in Japan are reducing their employees either through early retirement packages or general attrition. This makes it more difficult for earners to maintain their comfortable corporate pension schemes into their retirement years.

To simplify, based on 2019 calculations, the average salaried worker has a shortfall of approximately 20 million yen or more for his or her retirement years from age 60 to age 85 . This deficit is even more pronounced for healthy older people who live into their 90s. These reports and studies were published in 2019, long before recent inflation concerns soared in Japan and abroad.

With inflation accelerating around the world, including Japan, the cost of retirement must be higher; Therefore, the ’20 million yen problem’ should be even more acute.

What can you do about it as a resident of Japan?
This underfunding problem applies to everyone in Japan, including foreigners, as everyone is exposed to the four structural problems mentioned above. Additionally, foreigners in Japan have also been reluctant to invest their money and suffer near-zero interest rates on Japanese and foreign bank accounts.

For expats in Japan, the shortfall is probably many times greater than just 20 million . This is because, as an expat, you are less likely to qualify for full pension benefits from any country, including Japan. So the burden of preparing for retirement falls more heavily on the individual.

Furthermore, we must remember that the ’20 million JPY problem’ is about maintaining a basic income. So for those who wish to maintain a comfortable standard of living even after retirement, 20 million JPY is probably insufficient.

How can you make up the shortfall?
Making up for this retirement shortfall is simple: increase your ownership of assets, such as stocks, mutual funds, businesses, and real estate. Owning assets is the best way to combat inflation and grow your wealth in preparation for retirement. Historically, the global stock market offers the broadest and most attractive opportunities .

The most powerful tool you will have at your disposal to help you achieve these big goals is compound growth, so the sooner you start, the better.