Japan Pension Whale's $41 Billion Gain Masks Hard Time Ahead

  • GPIF is heading for losses at start of 2016, councilor says
  • Prime Minister Abe faces prospect of renewed criticism

As stocks go, so does the performance of Japan’s giant pension fund.

The $1.2 trillion Government Pension Investment Fund provided some respite for Prime Minister Shinzo Abe with a $41 billion gain in the three months ended December, rebounding from the worst quarterly loss in data going back to April 2008. It will probably prove fleeting, after Japanese equities posted their worst start to a year on record in 2016 and global shares tumbled. The fund, which doubled its allocation to stocks in October 2014, is seeing results whipsaw amid heightened volatility in markets.

QuickTake Japan's Pension War

Abe, who spearheaded GPIF’s shift into riskier assets, faces the prospect of renewed criticism that the move endangers pension savings when the fund reports its next quarterly results. The Topix index of Japanese shares has already dropped 13 percent this year, while a gauge of global equities fell 4.7 percent. It’s important to look beyond a three-month period when assessing the fund’s success, according to Amundi Japan Ltd.

“For pension funds, you can’t judge in terms of quarters,” said Akio Yoshino, chief economist at Amundi in Tokyo, which oversees the equivalent of $33 billion. “It’s better to digest things after a year of returns. If results are negative for the whole year, then it’s a problem.”

GPIF delivered a 3.6 percent return in the quarter ended December as its holdings rose by 4.7 trillion yen ($41 billion), according to documents released Tuesday in Tokyo. That’s the biggest increase since the same period of 2014. The fund gained 3 trillion yen on Japanese stocks and 1.6 trillion yen on overseas equities, as shares rebounded at the end of last year from a slump following China’s shock currency devaluation. GPIF has posted a 0.4 percent loss after the first three quarters of the fiscal year that ends March 31.

Most of the fund’s equity holdings are passive, which means performance tends to track benchmark gauges. The Topix had a total return of 9.8 percent in the quarter ended December, including reinvested dividends, while GPIF posted a 9.9 percent gain on local shares. While a panel advising Abe before the fund’s asset overhaul in 2014 recommended increasing active stock investments, the government blocked a proposal to allow in-house stock-picking at GPIF, according to local media reports. The Topix jumped 3.8 percent on Wednesday in Tokyo.

GPIF’s gain for the quarter ended December followed a 7.9 trillion yen drop in the value of its assets for the previous three months, the first decline since boosting its target allocation for domestic and overseas shares to half of holdings, or 25 percent each. By the end of December, GPIF had almost reached those goals, with local and foreign equities each accounting for 23 percent.

Darker Skies

There are darker skies ahead. As well as the slump in stocks since the start of 2016, the yen has surged against the dollar, which reduces the value of overseas investments when repatriated. A move into high-yield bonds has coincided with a rout in that asset class. Overseas debt was the only one of GPIF’s four main categories to drop in the December quarter, losing 1.1 percent.

GPIF is heading for losses at the start of 2016, Hiroyuki Mitsuishi, a councilor at the fund, said at a press conference in Tokyo on Tuesday. GPIF is managed for the long term and pensions won’t be impacted, he said, while noting the fund has returned 3.1 percent annually since its inception. Performance is more volatile with the current asset mix, but the risk of not meeting pension payments has receded, he said.

The fund and its overseers have already faced criticism in parliament about performance in 2016. GPIF probably lost 4 trillion yen in the first week of the year, opposition lawmaker Kazunori Yamanoi said in January, adding his office had been receiving calls from worried pensioners.

Summer Elections

Abe’s ruling Liberal Democratic Party returns to the polls in the summer for an election to the upper house of parliament. The stock market, which he has anointed as one of the most important mechanisms for economic revival, has stalled after benchmark indexes doubled earlier in his term.

“GPIF’s performance is perhaps the one issue that could really turn Abenomics into a liability for Abe,” said Tobias Harris, a political risk analyst specializing in Japan with Teneo Intelligence. “If it becomes increasingly apparent to voters that GPIF reform could put pensioners at risk, it is hard to see how Abe won’t suffer for it.”

For Amundi’s Yoshino, that still doesn’t mean Abe got it wrong when he changed the fund’s investment strategy.

“The shift to stocks from bonds has ultimately been a good one,” he said. “If GPIF had missed out on the Abenomics share rally, its results wouldn’t have improved.”

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