Japan’s Government Pension Investment Fund should adopt a short-term strategy as the central bank’s plan to spur inflation creates the risk of a bond rout, said the former head of the fund’s investment committee.
Japan is at a crossroads and GPIF probably needs a different investing approach compared with its long-term guidelines, which are based on economic scenarios for several decades, said Kazuo Ueda, a professor of economics at the University of Tokyo who led the panel for four years until his term wasn’t renewed last month. Shinzo Abe’s government would probably back such a move, Ueda said. The 128.6 trillion yen ($1.26 trillion) fund may cut “a big chunk” of its local bond holdings, he said.
Ueda adds another voice to the debate on how GPIF should overhaul its practices as the Bank of Japan makes unprecedented debt purchases to boost consumer prices. The fund has more than half its assets in domestic bonds, which offer the world’s lowest yields. GPIF is waiting for the results of a five-yearly health ministry review that may lead to changes in its long-term portfolio allocations.
“It’s hard to handle the current situation within the long-term portfolio,” Ueda said in an interview on May 8 in Tokyo. “It’s probably better to separate short- and long-term strategies at a time like this when inflation and yield levels could change dramatically.”
BOJ officials are increasingly concerned the nation’s bond market is failing to reflect emerging price gains, raising the risk of a sudden surge in yields, people familiar with the matter said last month. Inflation will probably accelerate to the central bank’s 2 percent goal next fiscal year, BOJ Governor Haruhiko Kuroda said after the central bank released its quarterly outlook on April 30.
The rate on 10-year sovereign notes rose just 1.5 basis points in the past year to .605 percent, even as the BOJ’s preferred inflation measure accelerated to an annual pace of 1.3 percent in March, from deflation of 0.5 percent a year earlier. The central bank buys about 7 trillion yen of sovereign debt each month.
Adopting a separate short-term strategy and selling Japanese government debt would be one way for GPIF to avoid losses if bonds slump, Ueda said. Other options noted by Ueda included shortening the duration of JGBs within the existing long-term strategy or setting wider deviation limits.
“GPIF’s actions will be meaningless unless they move quickly,” he said. “But they can’t make dramatic changes all at once so they will likely move in stages while monitoring the inflation situation.”
GPIF is under pressure to boost returns as pension payouts for the world’s oldest population swell. The world’s biggest manager of retirement savings overhauled its investment committee in April, adding three members of a state panel that urged it to review its domestic bond holdings and gain more independence from the health ministry.
Ueda was replaced as investment committee head by Yasuhiro Yonezawa, who sat on the panel handpicked by Abe. Ueda declined to comment on the investment-committee changes.
“The current political atmosphere makes it possible” that more radical changes to the fund, such as adopting a short-term investment strategy, will be considered, Ueda said. Abe’s cabinet “has had a strong influence on a series of changes, including the expert panel and a big revamp in the committee,” he said.
Finance Minister Taro Aso said last month that changes to GPIF will be unveiled in the government’s economic growth strategy in June. Masahiko Shibayama, head of a ruling Liberal Democratic Party panel on financial markets and corporate governance, said in an interview today he wants to replace the fund’s oversight by a single president with a board of experts who will actively consider more investment in stocks.
GPIF had 55 percent of its portfolio in domestic bonds and 17 percent in local shares at the end of December. The fund altered its domestic stock strategy in April, adding new managers and styles, and is planning active investments in a wider range of foreign bonds. The Topix index has declined 11 percent this year through May 9, trailing all major developed markets, according to data compiled by Bloomberg.
“GPIF may as well cut a big chunk of local bond holdings,” Ueda said. “They won’t need to give a complicated explanation for it. They can say they sold local bonds beyond what’s desirable in the long-term portfolio because they were conscious of inflation risk.”
Offloading the bonds is the easy part, according to Ueda.
“It’s really difficult to decide whether you hold the cash from selling the debt or put the money in local stocks or in foreign stocks and bonds,” he said. “The safest option is to hold cash and buy back local bonds after yields rise and returns improve.”