GPIF’s $709 Billion Bonds a Lost Opportunity, Utsumi Says

Observation Deck in Tokyo
Visitors look at a view of the city skyline from an observation deck in Tokyo. Photographer: Kiyoshi Ota/Bloomberg

Japan’s government pension fund is in “extreme danger” from investing mostly in local bonds with yields depressed by central-bank buying, said Makoto Utsumi, who helped shape the world’s largest retirement savings pool.

Yields are abnormally low due to the Bank of Japan’s asset purchase program, said Utsumi, a member of an advisory panel on the 2006 establishment of the Government Pension Investment Fund who is now president of debt-rating firm Japan Credit Rating Agency Ltd. GPIF, which held 58 percent of its 124 trillion yen ($1.2 trillion) portfolio in domestic bonds as of Sept. 30, will lose out on the chance for better returns by keeping them until redemption, he said.

“Holding bonds until maturity while the BOJ continues to intervene in markets means GPIF ends up with a huge amount of low-returning assets,” Utsumi, 79, said in an interview in Tokyo. Opportunity cost “is another type of risk. Is it right to settle on such low levels for the public’s pension returns?”

Utsumi’s comments add to a debate on whether GPIF should have so much money in local bonds as retirement payouts for the world’s oldest population rise. Takatoshi Ito, head of a panel that advised lawmakers last year on overhauling Japan’s biggest pension funds, said GPIF should sell now before the central bank reaches a 2 percent inflation target, which would boost yields and erode the value of the fund’s bond holdings. Higher yields wouldn’t mean losses as GPIF holds debt until it matures, its president Takahiro Mitani said in response.

BOJ Easing

The BOJ on Jan. 22 retained a plan to expand the monetary base through monthly bond purchases, which currently total more than 7 trillion yen.

Japanese 10-year government bonds yielded 0.61 percent as of 3 p.m. in Tokyo today, the lowest in the world. Japan is the only nation among 25 countries tracked by Bloomberg and the European Federation of Financial Analysts Societies with real rates below zero, based on the most recent inflation data.

The difference between the average and lowest bid prices at an auction of 30-year government bonds today indicated the weakest demand from investors since June.

Prices excluding fresh food increased 1.3 percent in December from a year earlier, the statistics bureau said Jan. 31 in Tokyo. The central bank forecasts that core consumer prices will rise 1.9 percent in the year starting April 2015, excluding the effect of sales-tax increases.

‘New Phase’

“We’re in a new phase in Japan’s economy, so it’s necessary to look at risk again in a completely new way,” said Utsumi, who led Japan’s currency policy from 1989 to 1991 as vice finance minister for international affairs. “I’m not going to simply say GPIF should just go and buy stocks. But when they review risk, they need to think about whether this abnormal monetary policy is going to continue for a while, and how monetary policy overseas is going to change.”

Institutional pension fund managers across 13 countries reduced the proportion of assets held in bonds to 29 percent in 2013, from 34 percent a year earlier, a global study by researcher Towers Watson & Co. showed Feb. 5. The managers boosted equity holdings to 52 percent from 47 percent.

“There are big risks right now with Japanese government bonds,” Utsumi said. “It’s just not right to simply say there won’t be losses because you hold to maturity.”