TOKYO, 1 September 2003 — When Japanese stocks plunged to 20-year-lows in the spring, much of the decline was blamed on a phenomenon known as daiko henjo, in which companies sold Japanese government assets invested in their pensions and returned them to the government. But with stocks jumping higher, people are speculating that daiko henjo sales are nearly complete, and that Japan will now recommit the cash to the stock market.

First, some explanations and definitions.

Decades ago, Japan persuaded companies to start pension schemes and seeded the funds with government money. The government adopted a target 5.5% return for its portion of the money.

As stocks slid during the 1990s, companies needed to make up the deficit with their own reserves. (Making up the deficit on government funds, it should be noted, wasn’t the only problem pensions faced; they’re still radically underfunded, which is why companies are introducing defined-contribution plans and other more simplified benefits.)

So a couple of years ago, Japan passed legislation that let companies apply to give back the state’s money, and the process has been dubbed daiko henjo. (Literally, daiko means “on behalf of,” and henjo means “return.”) The companies must return the money by September, either as cash or as an index fund that mimics Topix.

Don’t confuse daiko henjo with the other big depressant on Japanese stocks — the unwinding of cross-shareholdings. But it’s been a big factor of late, pressuring the large, liquid stocks that are widely held by global investors. (It’s also been blamed for dollar weakness, as pensions repatriated funds committed to foreign securities.)

Sales caused stock prices to decline further, raising even greater fears of pension shortfalls. Analysts figure that daiko henjo sales have totaled about 3 trillion yen of the 5 trillion yen that needs to be completed.

The peak selling was probably in July, when trust banks sold a record net 873.9 billion yen, versus 307.5 billion yen for the first two weeks in August. Analysts figure that daiko henjo-related selling will continue until the fiscal year ends in March, though it ought to slow drastically after this month.

The heavy volumes in Japan’s stock market — several times the volumes Japan saw last spring — stem from foreign buying on expectations of a cyclical recovery, but also from foreigners jettisoning European assets. And part of the surge, investors believe, came from government purchases made with daiko henjo money.

But don’t hold your breath for daiko henjo assets to be redeployed - the government isn’t planning to buy stocks anytime soon. In fact, it’s telling people it will sit on the assets until the next fiscal year, when its bureaucracy will be clear on whether the daiko henjo account is in surplus or in deficit. And some analysts say they’ve heard the funds will stay idle until July at the earliest.

Tohru Sasaki, the foreign-exchange strategist at J.P. Morgan in Tokyo and a Bank of Japan alumnus, believes the government won’t reinvest the money until at least July because of its complex accounting procedures. Sasaki figures that the government has about 20 trillion yen of daiko henjo money to reinvest in the financial markets. The upshot? “I think it’s bad news. Pensions are liquidating and that money isn’t going into the market. It’s a big issue!”

It’s an odd decision, because so much of Japan’s economic performance is tied to the performance of stocks. Japan’s banks are heavily collateralized with equity. And any investment manager stuck with cash in a rising market would be fired.

What’s certainly true is that the selling is moderating and virtually complete for many companies, as their own announcements attest. Alps Electric last week upgraded its earnings forecast for the current fiscal year because it expects higher profits after returning pension assets to the government. Mitsubishi Tokyo Financial also reported it expects extraordinary profits after its daiko henjo sales. A lot of the returned pensions are in the form of cash. Hitachi, one of Japan’s biggest pension managers, returned cash rather than securities.

Jesper Koll, the chief Japan analyst at Merrill Lynch, explains the government’s decision this way: “The asset allocation is part of the national budget process and the rule is that incoming funds during the fiscal year must be kept in cash and only actively managed from the start of the year.”

He recalls that in March, when the Nikkei flirted with 7,000, the ruling Liberal Democratic Party’s financial task force recommended changing the regulation to allow the government to reinvest the money.