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Japan's Silver Savers Will Bear the Brunt of 'Abenomics'

Tomohiro Ohsumi | Bloomberg | Getty Images

Kiyoko Kinugasa and her husband Minekatsu spent the last 49 years running a small, neighborhood snack shop in central Tokyo.

"We're trying to save more for retirement, but it isn't easy," said Kinugasa, 74, as her husband, 76, dabbed sweet azuki-bean paste into circles of batter on a hot iron grill.

"The future is uncertain."

A prime minister who was in grade school when the Kinugasas started working is now threatening to put their retirement goal even further out of reach.

With his nominee to head the central bank facing questions this week in parliament, 58-year-old Japanese Prime Minister Shinzo Abe is inching closer to implementing his plan to reverse deflation and revive growth. It may be just what Japan's economy needs, but it will come at the expense of Japan's fastest-growing demographic group: its so-called "silver savers," elderly Japanese like the Kinugasas who helped build Japan into an export-driven industrial powerhouse in the 1970s and 1980s, and who are preparing to live off their savings and pensions.

In the 20 years since Japan's economic bubble burst, the economy has stagnated, but thanks to low-grade deflation the elderly's purchasing power has steadily grown. Abe's plan to revive inflation stands to undo that, taxing the elderly -- figuratively and literally -- to finance a bet on recovery.

The fear is that Japan's silver savers will revolt. If the prospect of higher inflation and taxes convinces them to start liquidating their roughly $7.4 trillion in assets, some analysts and economists warn it could touch off a fiscal crisis that up-ends "Abenomics" before it gets a chance to work.

"Older people will whittle down their savings," said Koichi Haji, chief economist at NLI Research Institute. "That would make it more difficult for the government to sell new debt."

The Kinugasas took over their shop from Minekatsu's father in 1964, the year the Tokyo Olympics marked Japan's transition from post-war poverty to economic miracle.

(Read More: 'Abenomics' Picks Up Speed With Kuroda Nomination)

Over the next 25 years, Japan's per-capita gross domestic product tripled, thanks in part to policies similar in many ways to what Abe is prescribing today -- easy credit and big government outlays.

Abe plans to spend 100 trillion yen ($1 trillion) over the next 15 months on infrastructure. And his nominee to take over as governor of the Bank of Japan, Haruhiko Kuroda, has promised to adopt much more aggressive money-creation measures in pursuit of growth.

Abe's inflationary promises have already helped drive the yen down about 20 percent against the dollar since November. A 1 percent decline in the yen typically boosts corporate Japan's profits by about 1 percent.

But Japan is much older and much more deeply in debt than it was in the 1960s. Japan's government debt is proportionately the world's largest at more than double the gross domestic product.

"We've tried many times to stimulate our economy with fiscal spending and monetary stimulus, but the impact has always been temporary," said NLI Research Institute's Haji. "The current round of stimulus is probably the last, because public debt is too large and our population is ageing."

Ninety percent of Japan's debt is owed to Japanese investors, much of that either directly or indirectly to its silver savers.

Japanese over the age of 60 represent only about a quarter of the country's 127 million people, but they own roughly 60 percent of its 1,156 trillion yen ($12 trillion) in household assets, according to Bank of Japan data -- an amount roughly equivalent to the gross domestic products of Germany, France, Italy and the United Kingdom combined.

Their ranks are only growing. By 2035, according to government estimates, 30 percent of Japanese will be 65 or older.

(Read More: Does Japan Really Need $100 Billion in Spending)

Much of their money is deposited in commercial banks, which faced with weak growth and low demand for loans, invest it in government bonds. The same goes for pension funds and life insurers, which tend to favour the security of low-yielding government bonds over the risk of assets in higher-growth economies abroad.

Abe's gamble is that expectations of inflation will spur the elderly and their families to spend more, sparking a virtuous cycle of stronger domestic demand, job and income growth, resulting in higher tax revenues to whittle down debt.

Private economists say it is too difficult to estimate how much spending and tax revenue could rise. But inflation would lower the buying power of the money elderly Japanese earn on their bonds, and raise the amount they need to liquidate to fund retirement.

A spokeswoman for the prime minister's office, Hikariko Ono, said in a written response to Reuters that retirees' purchasing power would not decline because pension payouts are linked to changes in consumer prices. The government is also working to increase pension payouts for the poor, she wrote.

Whatever the risks, many economists argue Japan has little choice but to pursue inflationary policies. Estimates vary, but at some point in the next decade, the number of Japan's retirees will rise to the point that as a group they will start spending more than they save.

If by then the government cannot cut spending and reduce its debt, the kind of fiscal crisis now viewed as a risk might become a near certainty.

Plans by previous governments to cut pension benefits have stalled under Abe. But inflation provides a way to speed the natural transfer of wealth to Japan's younger generations from their older counterparts.

Abe is planning tax measures, too: He plans from 2016 to double the tax on capital gains and dividends to 20 percent and impose a 20 percent tax on interest earned on Japanese government bonds.

(Read More: Japan's Borrowing Trauma Could Haunt It for Years)

In 2015, he plans to raise the tax on estates, with the rate on the largest rising to 55 percent from 50 percent. The tax-free exclusion on inheritances will drop to 30 million yen, from 50 million yen. But the government will temporarily waive gift taxes on tuition paid on behalf of grandchildren.

Marketers have been quick to capitalise on the new policy direction with advertisements suggesting retirees chip in for expensive purchases like a new car. One running television spot for package vacations features a retiree enjoying a resort with her granddaughter. The travel agency's slogan is "Go Go Family," and they offer discounts if all three generations of the family travel together.

"Both the grandparents and the parents are combining their spending on the entire extended family," said Takamasa Sakai, R&D supervisor at the Hakuhodo Institute of Life & Living, a research centre affiliated with advertising agency Hakuhodo DY Holdings. "This could potentially lead to an increase in consumption," he said.

Higher consumption is exactly what Japan needs, say Abe's supporters. Critics counter that the government shouldn't expect silver savers to shell out more without also trying to protect their nest eggs from inflation.

"We, as old people, will expect hyperinflation, and the assets that we have built will disappear," said Takeshi Fujimaki, 62, the president of Fujimaki Japan, an investment advisory. Fujimaki said he was advising clients to prepare for inflation by shifting funds into foreign assets and currencies.

Japanese government bonds have rallied in recent months, however, with the yield on the 30-year bond falling to its lowest levels since mid-2010. One explanation is that investors remain confident that even if silver savers start to sell, the Bank of Japan will buy with newly minted cash and prop up demand.

The other explanation, analysts say, is that investors believe Abe and "Abenomics" are doomed to fail.

"It would mean a bear-market sell-off if Abe succeeds," said Shogo Fujita, chief Japanese bond strategist at Bank of America in Tokyo. "But what the bond market is telling us right now is that he won't."

Contact Asia Economy

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