Biggest Pension Fund at Risk Holding 60% in Japanese Debt
The set of policies from Prime Minister Shinzo Abe aims to defeat 15 years of deflation and spur growth by using the “three arrows” of fiscal stimulus, monetary easing and business deregulation. GPIF needs to reduce the risk of losses on its bond holdings should interest rates start to rise as the economy improves, said Takatoshi Ito.
“The majority of the panel thinks the GPIF is exposed to too much interest-rate risk,” Ito said in an Oct. 4 interview. “If they’re really aware of interest-rate risk, why are 60 percent of the assets in domestic bonds?”
An interim report from the panel on Sept. 26 showed some members wanted the 121 trillion yen ($1.25 trillion) GPIF to add new assets such as real-estate trusts, infrastructure and private-equity investments and commodities. The group will meet two to four more times before issuing its final report next month, Ito said.
The Bank of Japan unveiled an unprecedented monetary stimulus program in April, saying it would double monthly bond purchases to more than 7 trillion yen in pursuit of a 2 percent inflation target in two years. The easing has kept a lid on bond yields as it helped Japan’s exporters by sending the yen to a 4 1/2-year low of 103.74 per dollar in May.
The central bank’s inflation goal “is plausible” and the government pension fund “should be using this as their main scenario,” according to Ito, who is the dean of the Graduate School of Public Policy at the University of Tokyo.
“GPIF should be thinking of risk and returns on the basis of future economic forecasts,” he said.
The pension fund announced in June a cut to its target holding for domestic bonds, to 60 percent from 67 percent, while the proportion of foreign and local shares was changed to 12 percent each, from 9 percent and 11 percent respectively. Allocations will remain at the revised levels until at least March 2015, GPIF President Takahiro Mitani has said.
Mitani in June expressed doubt that the BOJ can achieve its inflation goal, saying in an interview that the transmission of policy pledges to changes in consumer price expectations “isn’t that smooth.”
GPIF posted its smallest gain in three quarters in the period ended in June because of record domestic bond losses. The advisory panel hasn’t discussed how much of the portfolio should move from bonds into other assets, Ito said, adding that those decisions are a “governance issue.”
The pension fund last week announced it was hiring staff for its investment management and research units. That followed recommendations in the panel’s interim report that more “front-line” experts are required to diversify investments and adopt more sophisticated risk-management measures.
“As an individual, I agree with the idea of breaking off some of the assets and putting them in a so-called baby fund,” said Ito, who has held roles at Japan’s Ministry of Finance and the International Monetary Fund. In June, he was named to the newly formed panel, which also includes Masaaki Kanno, the chief Japan economist at JPMorgan Chase & Co., and Mitsumaru Kumagai, the chief economist at Daiwa Institute of Research Ltd.
Abe last week unveiled a 5 trillion yen stimulus package to cushion the economy from a sales-tax increase due in April, the first since 1997. Data in the past couple weeks have shown that confidence among Japan’s large manufacturers climbed to a more than five-year high while core consumer prices rose the most since November 2008.
“If interest rate expectations rise, it’s possible wages will go up too,” said Ito. “The inflation target isn’t a transient 2 percent, it’s for inflation to settle around that level over the medium term.”
The Nikkei newspaper reported on Oct. 5 that GPIF plans to boost investment in growth-related shares. The fund will move some of its domestic stock holdings, 80 percent of which track the Topix index, to a new gauge focused on returns on equity, governance and trading volume, Nikkei said without citing anyone.
Domestic bonds are “vastly overweighted” at GPIF compared to other major public pension funds, which allocate about 30 percent at the most, according to UBS AG economist Daiju Aoki. While recommendations from Ito’s panel will go to the health ministry, which oversees public pensions, for approval, there is the chance for “major alterations” from the November report.
The ministry is likely aligned with Abe who “is keen to reallocate resources both to contribute to the sustainability of social welfare and to support market and corporate sentiment,” Aoki wrote in an Oct. 7 report.
The Topix has surged 33 percent this year. The nation’s sovereign bonds handed investors a 2.2 percent return in the same period, according to an index compiled by Bloomberg. Japan’s 10-year bond rose one basis point to 0.65 percent as of 1:05 p.m. in Tokyo after reaching 0.625 percent Oct. 4, a level not seen since May 10.
The yen touched an eight-week high of 96.57 per dollar today as investors sought haven assets amid speculation that a budget impasse in the U.S. will prevent lawmakers from raising the nation’s debt limit by an Oct. 17 deadline. Officials from China and Japan, the biggest foreign holders of Treasuries, have expressed concern about the potential for a U.S. default.
“I doubt we’ll see the U.S. fall into default on the 17th, but if it happened it would be worse than the Lehman shock,” Ito said, referring to the collapse of Lehman Brothers Holdings Inc. in 2008. “I can’t imagine Japan and China would just sit there quietly taking losses on their foreign reserves.”
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