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Japan Pension Panel Advises Review of Bonds Held by GPIF

Tokyo University Professor Takatoshi Ito
Takatoshi Ito, dean of the University of Tokyo's graduate school of public policy, was named to the newly formed panel to advise on investments by Government Pension Investment Fund (GPIF) and other government-related funds. Photographer: Tomohiro Ohsumi/Bloomberg

The panel advising Japan’s leaders on how to keep the Government Pension Investment Fund, the world’s largest manager of retirement savings, from running out of money said depending on domestic bonds has to stop after record fixed-income losses and as inflation returns.

The interim report from the panel of economists comes as market participants say the 121 trillion yen ($1.23 trillion) GPIF should increase its holdings of risk assets. Some members of the advisory group recommended adding new assets such as real-estate trusts, infrastructure and private-equity investments and commodities, yesterday’s report said.

“If you read between the lines of the report, you can easily imagine that the review of the portfolio means a decrease in the allocation ratio of domestic bonds,” Takatoshi Ito, who chairs the panel, said at a briefing in Tokyo after the group met. Its final recommendations will be announced in November he said.

Ito said in an interview earlier this week that there “was a consensus” to reduce the weighting of domestic bonds, as potential losses on the securities pose a risk for pension funds such as GPIF. The fund posted its smallest gain in three quarters in the period ended in June because of record domestic bond losses. Investors anticipate the fund will expand its purchases of foreign equities and bonds to boost profitability.

Overseas Investment

“Allocation to stocks can be raised, and it’s desirable to limit the home bias and increase overseas investment,” Masaru Hamasaki, a Tokyo-based senior strategist at Sumitomo Mitsui Asset Management Co., which oversees the equivalent of $112 billion, said on Sept. 25.

GPIF announced in June a cut to its target holding for domestic bonds to 60 percent from 67 percent, while the proportion of foreign and local shares was changed to 12 percent each, from 9 percent and 11 percent respectively. Allocations will remain at the revised levels until at least March 2015, GPIF President Takahiro Mitani has said.

The yield on Japan’s benchmark 10-year note declined one basis point to 0.68 percent in Tokyo today. That’s the lowest globally and 1 1/2 basis points from the least since May 10.

“Pension funds are among the biggest holders of Japan’s bonds, so I don’t expect them to sell in a way that triggers a collapse in the market,” Makoto Yamashita, the chief Japan rates strategist in Tokyo at Deutsche Securities Inc., said today. “Any decrease in bond allocations would be a reasonable degree, and if it’s a substantial reduction, it’s natural there would be a few years of a transition period.”

Portfolio Change

Ito, the dean of Tokyo University’s Graduate School of Public Policy, was named to the newly formed panel in June to advise on investments by GPIF and other government-related funds. The panel is discussing diversification into stocks, overseas bonds and alternative assets such as real estate funds, he said earlier this week.

“There will be a recommendation to change the portfolio,” Ito said on Sept. 24. “There is a consensus that we should reduce the domestic bonds.”

At yesterday’s briefing, Ito said that the panel didn’t get into specific portfolio ratios.

Japanese government bonds fell yesterday as domestic shares rose and the yen weakened on news that the pension reform panel was meeting.

Three Arrows

Prime Minister Shinzo Abe will decide on Oct. 1, after the release of the Bank of Japan’s Tankan survey of business sentiment, whether the economy is strong enough to go ahead with planned increases to the sales tax. He has pledged to defeat 15 years of deflation and spur growth in the world’s third-largest economy using the so-called three arrows of fiscal stimulus, monetary easing and a package of growth-oriented initiatives including deregulation.

Government data today showed the nation’s consumer prices excluding fresh food climbed 0.8 percent in August from a year earlier, the fastest pace since November 2008.

“If they’re assuming deflation will continue, they’re fine to keep allocations unchanged,” Tsutomu Yamada, a market analyst at Kabu.Com Securities Co. in Tokyo, said by phone on Sept. 25 of pension fund investments. “If, on the other hand, Japan is expected to achieve 2 percent inflation, 2 percent real economic growth and 4 percent nominal growth over the next 10 to 20 years, GPIF could probably raise its allocation to domestic equities by about 10 percentage points.”

Bonds, Stocks

Japan’s Topix index of shares surged 42 percent this year through yesterday, the most among developed markets. The MSCI World Index of developed equities climbed 16 percent. Japanese sovereign bonds handed investors a 1.9 percent return in the same period, according to an index compiled by Bloomberg.

“Public pension funds without domestic shares won’t do well with inflation and need to be changed to be in line with the nation’s strategy to beat deflation,” Kyoya Okazawa, the head of global equities and commodity derivatives at BNP Paribas Securities (Japan) Ltd., wrote in an e-mail response to inquiries on Sept. 25. “The large allocation to government bonds that rely on tax revenue is inconsistent with the pessimistic view on local companies that pay corporate tax.”

The BOJ unveiled an unprecedented monetary stimulus program in April, saying it would double monthly JGB purchases to more than 7 trillion yen in pursuit of a 2 percent inflation target. The easing has kept a lid on bond yields as it helped Japan’s exporters by sending the yen to a 4 1/2-year low of 103.74 per dollar in May.

Japan’s 10-year bond yield swung from an all-time low of 0.315 percent to as high as 1 percent after the BOJ announced its easing plan. The five-year average is 1.08 percent.

“It’s natural to reduce the weighting of domestic bonds considering yields have fallen toward an all-time low, limiting returns, and given a risk that yields will rebound,” Kazuhiko Ogata, the chief Japan economist in Tokyo at Credit Agricole SA, said on Sept. 25. “The BOJ will have to keep its foot on the gas pedal as it struggles to achieve its inflation target. That bolsters investor confidence and provides support to risk assets.”

Bloomberg News surveyed investors, analysts and economists on what the pension panel should advise GPIF to change its portfolio to in its report expected in November. Figures are in percent of the total portfolio.

                              Domestic    Foreign
                          Bonds/Stocks Bonds/Stocks  Cash  Alt.
M. Hamasaki, S’tomo Mitsui A.    58/16    8/17        1     0
K. Ogata, Credit Agricole        50/20    10/10       5     5
K. Ishigane, M’bishi UFJ Asset   45/15    14/16       5     5
K. Okazawa, BNP Paribas          na/20    na          na    na
I. Takamatsu, Bayview Asset      35/20    25/15       5     na
T. Fujimaki, lawmaker            30/na    70 (combined)na   na
S. Fujita, BoA Merrill           55/13    13/14       5     na
H. Muto, S’tomo Mitsui Asset     53/14    14/14       5     na
T. Okubo, Japan Macro Advisors   60/12    8/9         5     0.5
N. Naeimi, AMP Capital           45/25    5/10        5     10
T. Yamada,              60/12    11/12       5     na
A. Sera, S’Tomo Mitsui Trust     55/15    11/14       5     0
GPIF current target allocation   60/12    11/12       5     0

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