GPIF Should Hold Cash After Dumping Bonds, Ito Says

Photographer: Tomohiro Ohsumi/Bloomberg

Takatoshi Ito, professor at the National Graduate Institute for Policy Studies. Close

Takatoshi Ito, professor at the National Graduate Institute for Policy Studies.

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Photographer: Tomohiro Ohsumi/Bloomberg

Takatoshi Ito, professor at the National Graduate Institute for Policy Studies.

The world’s biggest pension fund should consider sitting on cash after selling Japanese sovereign bonds, said the government’s top adviser on the overhaul, after the Topix (TPX) index of stocks rebounded 10 percent amid anticipation of retirement-plan buying.

While the Government Pension Investment Fund must take the opportunity to sell debt amid central-bank stimulus that is holding down yields, there’s less pressure to invest the proceeds, said Takatoshi Ito, who led a panel that advised the government on overhauling the 128.6 trillion yen ($1.3 trillion) fund. GPIF should avoid buying into markets that have rallied on bets its purchases will boost prices, he said.

“It’s OK if there’s a gap in timing between selling JGBs and buying Japanese stocks and overseas assets,” Ito, a professor at the National Graduate Institute for Policy Studies in Tokyo, said in a June 19 interview. “If they hold cash and short-term bills, they also have the option of buying back some bonds after yields finish rising.”

The Topix has surged 10 percent from a May 21 low, outpacing a global stock rally, as investors speculated that inflows from the world’s biggest pension fund would accelerate. GPIF may change its strategy as soon as August, and putting 20 percent of its assets into local stocks wouldn’t be too much, Yasuhiro Yonezawa, who heads its investment committee, told the Nikkei newspaper this month.

GPIF should cut its target holdings of domestic bonds to 40 percent from 60 percent, while boosting local shares to 20 percent from 12 percent, Ito said. That matches the median estimates in a Bloomberg survey of analysts and investors last month. After completing his role advising on pensions, Ito currently heads a Ministry of Finance panel working on reviving Japan’s capital markets.

Government Pressure

The pension fund is under increasing pressure to invest less conservatively and pare its ownership of Japanese government debt as inflation accelerates. Economy Minister Akira Amari said June 6 that the government will include reform of GPIF in its economic growth strategies, due to be be finalized this month, and it will seek stronger governance at the fund.

GPIF is already selling local debt and there are indications it’s buying equities. Japanese pension funds including GPIF accelerated net sales of domestic government bonds to 1.85 trillion yen in the first three months of this year, according to central bank data.

Trust banks, which often buy and sell on behalf of pension investors, added money into local stocks for seven straight weeks through June 13, exchange data show. The Topix added 0.1 percent at the close of trading in Tokyo today.

Following Recommendations

GPIF has been carrying out the recommendations of Ito’s pension panel, including investing in infrastructure and adopting stock strategies that favor local companies with higher return on equity.

While the group said in November that GPIF should look to invest in alternative assets, it shouldn’t do that until the government improves the fund’s governance, Ito said. The fund needs a board of directors to help make investment decisions, he said.

GPIF held 55 percent of its assets in local bonds as of Dec. 31, 17 percent in domestic stocks, 15 percent in foreign stocks and 11 percent in overseas debt.

GPIF’s new portfolio will be adopted by three other public funds managing a combined 28.8 trillion yen, according to Ito. The funds for civil servants and private schools, which are required to bring their asset allocations in line with GPIF in October 2015, may act sooner, he said.

Bond Targets

The domestic-bond target is currently 74 percent of assets at the Federation of National Public Service Personnel Mutual Aid Association, 64 percent at the Pension Fund Association for Local Government Officials and 65 percent at the Promotion and Mutual Aid Corporation for Private Schools of Japan.

“GPIF is far bigger than the others,” Ito said. “It’s poised to form a new portfolio earlier than expected and I think that will be the de facto model for the other three. They have no choice but to follow.”

To contact the reporters on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; Shigeki Nozawa in Tokyo at snozawa1@bloomberg.net

To contact the editors responsible for this story: Sarah McDonald at smcdonald23@bloomberg.net Tom Redmond

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