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GPIF Rushing Into Riskier Assets Before Ready, Okina Says

Japan's Prime Minister Shinzo Abe
Shinzo Abe, Japan's prime minister. The bond-heavy Government Pension Investment Fund is expected to boost local stocks to about 20 percent of assets in coming months after Prime Minister Shinzo Abe ordered a faster review of its portfolio and included the overhaul in the nation’s growth strategies. Photographer: Tomohiro Ohsumi/Bloomberg

The world’s biggest pension fund is planning to buy more risky assets before it has the structure to cope with the investment overhaul, an economist specializing in state retirement programs said.

The 128.6 trillion yen ($1.3 trillion) Government Pension Investment Fund needs rules for cutting losses when asset prices fall, according to Yuri Okina. GPIF must also get agreement for a clearer mechanism for safeguarding the fund when its finances deteriorate. Governance changes should be completed before the portfolio overhaul, said Okina, who’s also an adviser to the finance ministry and a director of Bridgestone Corp.

The bond-heavy fund is expected to boost local stocks to about 20 percent of assets in coming months after Prime Minister Shinzo Abe ordered a faster review of its portfolio and included the overhaul in the nation’s growth strategies. Planned reform of its governance structure, including adding a board of directors, is taking longer after a bill to change it wasn’t submitted in the most recent Diet session.

“There’s a lot of focus on how GPIF can revitalize the stock market and that has been coming first,” Okina, an economist at Japan Research Institute Ltd., said in an interview in Tokyo on June 23. “The fund needs to decide on things like organizational structure and what its goals are at the same time.”

GPIF has a 60 percent target for domestic debt and 12 percent for Japanese stocks. It may increase equities to 20 percent and reduce bonds to 40 percent, according to a Bloomberg News survey of 10 fund managers, strategists and economists last month. The nation’s consumer prices excluding fresh food rose 3.4 percent in May from a year earlier, the fastest pace in 32 years, a report showed today.

Good Diversity

“Given that Japan is exiting deflation, I do think GPIF needs to diversify its assets,” Okina said. “But it needs to be clearer on how it’ll do this. It needs more distance from the government and to be clear it’s for the benefit of pension savers and retirees.”

Before taking on more risk, GPIF must set rules for when to cut its losses, Okina said. It must also reach a verdict with the health ministry on what to do when investment losses threaten the fund’s sustainability, she said, giving the example of whether it should cover shortfalls by asking for bigger contributions from workers or lowering payouts to retirees.

The health ministry created a system in 2004 where pension payouts can vary based on wage growth and inflation in order to safeguard pension finances in a rapidly aging population. This system has not been put into effect yet, according to a ministry official. The adjustments are limited during deflationary times and this needs reconsideration, Okina said.

Quick Review

Revising GPIF’s investment strategy in response to long-term economic changes and to secure pension finances should be done as quickly as possible, Abe’s government said in its growth strategy this month. The paper also called for strengthening of GPIF’s governance and changing the legislation under which it operates.

The Topix index of equities was poised for a 5.2 percent rally in June as of yesterday, its biggest gain since November, as investors speculate that the GPIF changes will bolster inflows into the world’s second-biggest equity market.

“With GPIF being a part of Abe’s growth strategy, and with it moving toward investing more in stocks, there needs to be more clarity on who GPIF are operating for,” said Okina, who used to work at the Bank of Japan and also advises the government on regulatory reform and fiscal stability. Changes to GPIF’s portfolio “need to be done with clarity that it is solely for the benefit of pensioners.”

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