We investigate how the Japanese pension market for funded employment-based pensions is changing and how it might be strengthened in order to better serve one of the most rapidly aging populations in the world. Public and private pensions in Japan are estimated to hold around US$3 trillion, making that system the second largest globally after the United States. However, unfavorable economic developments have cut sharply cut into asset values, and the weak economy is undermining traditional

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... me employment contracts. Recent legislation permitting the establishment of defined contribution plans in Japan may provide new employer-sponsored retirement plan opportunities. We first describe the Japanese pension system at the end of the 20th century and provide an overview and evaluation of the changes in the pension arena emerging from the 2001 legislation. Next we show that important design questions remain to be answered, if Japanese employment-based pensions are to be reformed and modernized. Finally we indicate lessons gleaned from recent changes in US pension plans. The Japanese population is aging more rapidly than any other, and very low fertility rates going forward mean that this nation's population will start shrinking within the next few years. 1 International retirement system experts would do well to examine developments in Japanese retirement policies, so as to assess how employer-sponsored pensions fare in such a rapidly aging society. Demographic change in Japan also places pressure on plan sponsors to efficiently manage pension funds and to offer costeffective pensions that workers value. Government policymakers must monitor and revise natio nal pension systems and develop appropriate regulations and tax policies for employer pension plans. Coordination of public and private retirement programs will be essential in the coming decades. Two important questions are addressed in the present analysis: how is the Japanese pension market for funded employment-based pensions evolving, and what additional steps are needed to strengthen public and private retirement plans? The Japanese pension system is one of the largest in the world, second only to that of the United States pension market. Institutional public and employer pension assets in Japan have been estimated to be around US$3 trillion (Conrad 2001; Cerulli 1999) , of which some US$0.6 trillion are in private plans (Sakamoto, 2001). But economic news has not been favorable for Japanese pension plans of late. Financial stagnation has sharply reduced asset values, lowered returns on bonds and other fixed income assets, and raised unemployment rates. 2 In addition, the weak economy