Japan’s Purchasing Power to Decrease Significantly
The following is a summary of the latest information-based estimates of the average annual increase in workers’ expenses with respect to the Japanese government’s proposed bill to divert employee pensions (Pension System Reform Bill). The exchange rate is converted to U.S. dollars based on the exchange rate of 150 yen to the dollar as of May 31, 2025.
Overview of the Bill and Impact of Increased Outlays
The following major changes in the pension system revision bill approved by the Cabinet on May 16, 2025 may affect the burden on workers:
Increase in employee pension premiums for high-income earners:
Maximum monthly standard compensation for employee pensions will be increased from the current 650,000 yen (about 8 million yen per year) to 750,000 yen (about This change is scheduled to take effect in September 2027 and will be phased in at the end of the fiscal year. This change will be phased in from September 2027.
For eligible high-income earners (monthly income of 650,000 yen or more), the monthly premium burden is expected to increase by a maximum of approximately 9,000 yen on a 50-50 labor-management basis, or approximately 108,000 yen per year.
The post on X points out that for salaried workers with monthly incomes of 650,000 yen or more, the combined labor-management burden will increase by a maximum of approximately 220,000 yen per year.
The burden on individual workers (in the case of 50-50 labor-management split) is estimated to be approximately ¥108,000-110,000 per year.
Dollar conversion: ¥108,000 ÷ ¥150/$ = approximately $720/year.
Expansion of employee pension coverage for part-time workers:
The scope of employee pension coverage for part-time workers (e.g., part-timers) will be expanded and the requirement of company size will be eliminated (from October 2024 for companies with 51 or more employees, to be expanded to all companies in the future). Workers who work more than 20 hours per week and earn more than approximately 1.06 million yen per year will be newly enrolled in the Employees’ Pension Plan.
Premiums for newly enrolled workers will vary depending on their income. For example, for a monthly income of 100,000 yen, applying the premium rate of 18.3% (9.15% for labor and management on a 50/50 basis), the worker would pay approximately 9,150 yen per month, or approximately 109,800 yen per year.
Dollar conversion: ¥109,800 ÷ ¥150/$ = approximately $732/year.
However, it is difficult to calculate the average increase in the burden for short-time workers because of the large individual differences in their incomes.
Diversion to the basic pension and overall impact:
The bill includes a proposal to divert a portion of the welfare pension to raise the basic pension. x The post above points out that this may cause the working-age population to bear the double burden of “increased premiums + decreased benefits,” but official figures on the specific amount of diversion and the overall increased burden on workers However, official figures on the specific amount of diversion and the overall increase in the burden on workers have not yet been announced.
Data from the Ministry of Health, Labor, and Welfare suggests that an increase in the ceiling on wages used to calculate insurance premiums and pension amounts may increase the burden on workers with incomes above a certain level, while the amount of future pension benefits may increase in proportion to wages.
Average annual increase in expenses for all workers
High-income workers (monthly income over ¥650,000): approx. ¥108,000-110,000 per year (approx. $720).
Short-time workers (newly enrolled): Depends on income, but for a monthly income of ¥100,000, about ¥109,800 per year (about $732).
Average for all workers: Since the impact of the bill is mainly limited to high-income earners and short-time workers who newly enroll in the welfare pension plan, it is difficult to calculate the average increase in spending for all workers. It is estimated that only about 5% of Japan’s total employee pension enrollees (about 40 million people) are high-income earners with monthly incomes of 650,000 yen or more, and that the number of new part-time workers enrolling in the pension plan is also limited. Therefore, the overall average increase in out-of-pocket expenses may be within a few thousand yen to 10,000 yen per person per year (approximately $20-70) when the burden of high-income and short-time workers is prorated by the population.
Note
The specific burden increase will vary greatly depending on individual income and employment status (full-time, part-time, etc.).
Details of the bill (final adjustments to the amount of diversion and premium rates) will be available by the time it goes into effect in 2027.
Translated with DeepL.com (free version)
How much will this bill reduce Japan’s purchasing power, how much will it depress GDP, and how much will it make the U.S. less likely to buy U.S. products?
Below we summarize our estimates and analysis of the impact on purchasing power, GDP, and demand for U.S. products if the Japanese government’s proposed pension reform bill (approved by the Cabinet on May 16, 2025), which would utilize the accumulated funds of employee pension plans, were to go into effect. Please note that specific numerical data depends on the details of the bill and economic modeling, and thus estimates are limited. The exchange rate is based on an exchange rate of 150 yen to the dollar (as of May 31, 2025).
1. Impact on Japan’s Purchasing Power
The impact on purchasing power occurs primarily through a decrease in workers’ disposable income (take-home pay). The following factors will be considered:
Increase in employee pension premiums:
For high-income earners (monthly income over 650,000 yen, annual income about 8 million yen), the premium burden will increase by about 108,000 to 110,000 yen per year (about $720).
For short-time workers (monthly income of approximately 100,000 yen), the annual burden increases by approximately 109,800 yen (approximately $732) by newly enrolling in an employee pension plan.
According to an IMF report, Japan’s households have a low propensity to consume (the savings rate is about 10%), so the effect of the increased premium burden on consumption is limited, but the impact is not zero.
Example: If a worker with an annual income of 8 million yen (about 5% of workers) bears an increased burden of 108,000 yen, consumption may decrease by about 0.1% to 0.5% (assuming a consumption propensity of 0.5 to 0.8). For workers as a whole, the overall decline in purchasing power is estimated to be less than 0.1% because the percentage of high-income and short-time workers affected is limited (about 10-15% of the total).
Indirect Impact of Raising the Base Pension:
Raising the base pension may increase future pension benefits, but will have a negative impact on current purchasing power because it will be preceded by a short-term increase in premiums.
In the post on X, the increase in insurance premiums is referred to as a “stealth tax increase” and concerns about a decline in purchasing power are noted, but specific figures are not provided.
Conclusion: While a decrease in purchasing power will result from a decrease in disposable income for eligible workers, the overall impact will be limited, with an estimated decrease in purchasing power of less than 0.1% for the nation as a whole.
2. Impact on GDP:
The impact on GDP is assessed through a decrease in consumption due to the decline in purchasing power and changes in the fiscal and economic structure associated with pension reform:
Impact of reduced consumption:
Personal consumption accounts for about 60% of Japan’s GDP. A 0.1% decline in purchasing power is a depressing factor of about 0.06% of GDP, equivalent to a decline of about 360 billion yen (about $2.4 billion) in terms of nominal GDP (about 600 trillion yen, or $4 trillion) in 2024.
However, the IMF’s 2025 forecast projects that Japan’s economy will grow 1.1% (1.6% per capita), and rising wages (about 5% increase in the spring labor market) will support consumption, which may offset the GDP-pushing effect of pension reform.
Impact of Fiscal Policy and Structural Reforms:
While increased premiums from pension reform may reduce the government’s budget deficit (about 10% of GDP), there is a risk of increased fiscal pressure from the diversion of funds and increased treasury contributions (about 2 to 2.5% of GDP) associated with the bottom-up of basic pension benefits.
The IMF points out that pension reform may have positive effects on economic growth (e.g., higher labor participation rate due to higher retirement age), but short-term consumption restraint is a negative factor.
Overall, the direct GDP depressing effect of pension reform is estimated to be around 0.05%-0.1%, but is likely to be largely offset by wage increases and other fiscal stimulus measures (e.g., a 3% GDP size fiscal package in November 2023).
Conclusion: the push-down effect on GDP is **0.05%-0.1% (about 300-600 billion yen, 20
