The world’s largest retirement fund should seek to sell 25 trillion yen ($245 billion) of Japanese bonds as soon as possible, said the head of a panel that advised the government on overhauling pension investments.
The Government Pension Investment Fund should start shifting from local debt to other assets now, and the Bank of Japan could be a buyer, Takatoshi Ito said in an interview in Tokyo today. The fund should pare total bond holdings to about 35 percent of assets, he said. GPIF had 55 percent of its 128.6 trillion yen in domestic bonds and 11 percent in offshore debt as of Dec. 31.
“Inflation is entering a new stage and large-scale changes are needed for GPIF’s portfolio,” Ito said. “GPIF should immediately shift from domestic bonds into other assets.”
GPIF is facing mounting pressure to boost returns as pension payouts for the world’s oldest population swell and Prime Minister Shinzo Abe and the Bank of Japan seek to spur price gains. The fund altered its domestic stock strategy this month, adding new managers and styles, and is planning active investments in a wider range of foreign bonds. The health ministry is working on a five-yearly review of public pensions that may lead to a change in GPIF’s asset allocations.
Ito has held meetings with cabinet ministers to monitor GPIF’s progress and will meet another two or three times, he said.
“The cabinet is the driver of change” for GPIF, Ito said. “The cabinet is going to keep pushing.”
The fund led by Takahiro Mitani is likely to revamp its portfolio allocations by June, after the ministry review is finalized, and has already made significant strategy changes, according to Ito. GPIF has announced plans to invest in infrastructure and buy inflation-linked bonds, and the health ministry, which oversees the fund, approved a plan to pay higher salaries to attract investment experts.
“If you look at the changes GPIF made this year so far, they show that Mitani is moving forward,” said Ito. “The health ministry isn’t stepping on the brakes at least, but it doesn’t seem like it’s hitting the accelerator either.”
Unprecedented monetary easing by the BOJ caused consumer prices excluding fresh food, the central bank’s preferred measure of inflation, to rise 1.3 percent year-on-year in February.
Yields on 10-year Japanese sovereign debt stood at 0.61 percent yesterday, the lowest rate in the world, data compiled by Bloomberg show. GPIF should sell long-dated JGBs first as their prices are more sensitive to inflation, Ito said.
GPIF should put half its assets in stocks and increase its yearly return goal to 5 percent, Ito said in an interview in February. While Ito doesn’t have a specific target allocation for GPIF’s equity investments, the fund should use periods of declines in local stocks to buy them, he said today.
The Topix index has lost 10 percent this year for the worst performance among developed-market gauges tracked by Bloomberg. It soared 51 percent in 2013.
GPIF has implemented the first stage of his panel’s recommendations, Ito said separately at a conference in Tokyo today. Moves are under way to change the law governing the fund, he said. Ito’s group advised last year that GPIF should be made more independent of the health ministry, which currently oversees its budget and investment strategy.
Nine of the 10 members of GPIF’s investment committee, none of whom are in-house or full-time, will be ending their terms soon, Ito said. Kimikazu Noumi, president of the government-backed fund Innovation Network Corporation of Japan, is likely to be the only person to remain on the committee, Ito said. GPIF will probably announce new members this month, and a few of them should have full-time positions, he said.
GPIF said this month it will reduce its traditional active management of local stocks in favor of smart-beta strategies and include the JPX-Nikkei Index 400, which focuses on companies with good return on equity, as a benchmark. GPIF is in talks on investing in private equity, Reuters reported this month. Ito’s panel recommended in November that the fund track the JPX-Nikkei 400 and consider private-equity investments.
GPIF should not fixate too much on the return target set last month by the ministry of health and should seek higher returns while considering risks, Ito said. Ito said in February that a 5 percent goal would be appropriate. The health ministry decided on March 10 that GPIF should target yearly returns of 1.7 percent plus the rate of wage growth. This implies a 4.2 percent nominal goal based on cabinet office assumptions for salary increases under the preferred economic scenario.
“It doesn’t mean that once GPIF meets its target, it doesn’t have to do anything else,” Ito said. “As long as risk is controlled, they should aim for higher returns.”
Kotaro Mori, who is in charge of fund management at the health ministry, said on March 14 that GPIF should seek the returns needed while taking the least risk possible.
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