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Japan Pension Fund Must Fix Governance First, LDP Says

Liberal Democratic Party Deputy Policy Chief Yasuhisa Shiozaki
Liberal Democratic Party’s deputy policy chief Yasuhisa Shiozaki said today, “We have to fix GPIF’s governance structure in the extraordinary session and then rework its portfolio. Governance reform is paramount and it’s important to get it done before the weightings get changed this fall.” Photographer: Kiyoshi Ota/Bloomberg

Aug. 6 (Bloomberg) -- As the world’s biggest pension manager moves closer to putting more money in risky assets, the ruling Liberal Democratic Party’s deputy policy chief says the fund needs to change its governance first.

Japan should submit a bill in the next parliamentary session to overhaul the structure of the 126.6 trillion yen ($1.2 trillion) Government Pension Investment Fund, Yasuhisa Shiozaki said in a speech at Bloomberg’s offices in Tokyo yesterday. With the fund working on a separate investment-strategy review, discussion is needed on whether it’s right to alter asset allocations before the law change, he said.

“We have to fix GPIF’s governance structure in the extraordinary session and then rework its portfolio,” said Shiozaki. “Governance reform is paramount and it’s important to get it done before the weightings get changed this fall.”

Policy makers seeking to add a board of directors and tougher oversight of GPIF’s investment decisions are running out of time to revamp the fund’s legal structure before it announces its asset review, expected in Japan’s autumn. The Topix index rose 12 percent from this year’s low on April 14 through yesterday amid speculation that GPIF will buy more local shares.

“The investment and governance reforms should go hand in hand, with governance coming first,” Shiozaki said.

Prime Minister Shinzo Abe’s growth policies, revised in June, urged GPIF to immediately alter its asset mix as the economy exits deflation, and strengthen the fund’s oversight.

LDP Plans

The LDP is working on a bill to establish a board of six or seven directors to oversee GPIF, Kozo Yamamoto, a party official in charge of preparing the policy, said in May. Changes may also include allowing direct investments in a broader range of assets, as well as the creation of risk and governance committees, Yamamoto said.

The overhaul of GPIF is likely to be successful because Abe’s government has a firm grip on power and can push changes through, Takatoshi Ito, who headed a group that advised lawmakers on public pensions last year, said in a panel discussion at yesterday’s Bloomberg event.

“The premise is the Abe regime will remain in power for the long term,” Ito said. “If it’s an administration that will be around for a long time, it’s harder for people to say no.”

Under the current system, GPIF President Takahiro Mitani and the health ministry have the final say on investment decisions and the fund is barred from buying stocks directly.

GPIF is already making changes that don’t require parliamentary approval, announcing plans this year to invest in infrastructure, adopt Japan’s stewardship code and hire new domestic stock managers. The fund has also won flexibility to pay higher salaries to attract investment staff.

Seven Samurai

“GPIF has less than 100 people, and it’s been said only seven of them are investment professionals, like the seven samurai,” Shiozaki said. “We really need to add experts.”

GPIF has started a serious review of its portfolio, Shigehito Aoki, an official at the fund, said at a briefing last month as it reported an 8.6 percent return in the year through March, buoyed by an equity rally in the first three quarters.

The Topix sank 0.8 percent to 1,254 as of 10:23 a.m. local time, its fifth day of declines. The measure plunged 7.6 percent in the first three months of this year, before rebounding 5 percent the following quarter.

“We want GPIF to diversify its investments,” Shiozaki said in an interview with Bloomberg after his speech. “We aren’t saying they should buy more stocks. They should decide what to buy themselves.”

Reducing Risk

The fund isn’t holding the right assets to reduce its investment risk, especially as Japan’s inflation picks up, according to Shiozaki.

“They have too much domestic debt,” he said. “Their asset allocations have been off when you think of risk management.”

GPIF will pare domestic bonds to 40 percent of holdings and boost local stocks to 20 percent, according to the median estimate from a Bloomberg survey of analysts in May. That would require selling 19.5 trillion yen of debt and buying 4.5 trillion yen of equities, calculations by Bloomberg using the fund’s holdings at the end of March show.

“Is it OK for GPIF’s governance to stay the same when its asset allocations change?” Shiozaki said. “We have to think about that.”

To contact the reporters on this story: Anna Kitanaka in Tokyo at; Shigeki Nozawa in Tokyo at; Yoshiaki Nohara in Tokyo at

To contact the editors responsible for this story: Sarah McDonald at John McCluskey

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