World’s Oldest Population Drives Asian Bonds in Quest for Yield
Asian bonds are reaping the benefits of Japan’s aging population like never before.
Record amounts of Japanese cash are flowing into the region’s fixed-income markets as the demands of the world’s oldest population force the nation’s pension funds to load up on higher-yielding assets overseas.
Japan’s $1.3 trillion Government Pension Investment Fund, the largest globally, said it’s cutting holdings of local bonds that offer the world’s lowest yields and seeking better returns abroad to meet mounting payouts. Nomura Holdings Inc. estimates such funds will pump about $200 billion into overseas bonds and stocks, purchases that will shield Asian assets against capital outflows as the U.S. Federal Reserve dials back stimulus.
“The moves by GPIF and other public pension funds should be positive for pretty much all of Asia’s financial markets,” Thiam Hee Ng, a senior economist at the Asian Development Bank in Manila, said in a June 27 e-mail interview. “Japanese investors have traditionally been quite conservative. We’d expect that they would focus their investment on the more developed and high-rated markets in Asia like Korea, Hong Kong or Singapore.”
Investors in Japan boosted their bond holdings in the rest of the region by 399.5 billion yen ($3.94 billion) this year through April, the biggest increase in Ministry of Finance data going back to 2005. Singapore received a record 163.1 billion yen, followed by Hong Kong’s 74.6 billion yen and Malaysia’s 70.9 billion yen.
Asia’s sovereign bonds returned 5.5 percent this year, outpacing the 1.5 percent gain in Japanese notes, according to Bloomberg indexes. The region’s corporate debt handed investors a gain of 5.6 percent, compared with 0.8 percent on Japanese bonds, according to Bank of America Merrill Lynch indexes.
Japanese pension funds including GPIF accelerated net sales of domestic government bonds to 1.85 trillion yen in the first three months of this year, the most since the second quarter of 2012, central bank data show.
GPIF’s reshuffle will raise its target for holdings of overseas bonds to 14 percent of assets from 11 percent, and that for foreign stocks to 17 percent from 12 percent, according to projections in a Bloomberg survey of 10 fund managers and analysts. The ratios were 11 percent and 15 percent at the end of last year, respectively, according to the fund’s website.
GPIF’s new portfolio will be adopted by three other public funds managing a combined 28.8 trillion yen, Takatoshi Ito, who led a panel that advised the government on GPIF’s overhaul, said in a June 19 interview. They are the Federation of National Public Service Personnel Mutual Aid Associations, Pension Fund Association for Local Government Officials and Promotion and Mutual Aid Corporation for Private Schools of Japan, he said.
About one in four people in Japan are 65 or older, the highest-ever ratio, an Internal Affairs Ministry report showed in January, and its birth rate is the fourth-lowest among member nations of the Organization for Economic Cooperation and Development.
Increasing payouts are pressuring GPIF to improve returns that averaged 2.8 percent in the nine years through March 2013. That compares with 5.2 percent for Norway’s Government Pension Fund Global and 7.3 percent for the California Public Employees’ Retirement System, the biggest managed U.S. fund.
“Because of the aging demographics you are going to get pension liabilities building up,” Vishnu Varathan, a Mizuho Bank Ltd. economist in Singapore, said in a June 26 phone interview. “What they need is to earn higher returns, and part of that can be augmented by a weak yen when they repatriate foreign assets, coupons or dividends.”
Japanese Prime Minister Shinzo Abe is counting on a weakening yen to eradicate deflation and support exports. The yen has dropped 1.8 percent against the dollar in the past 12 months, the worst performance among the Group of 10 currencies. It has strengthened 3.8 percent in 2014, after sliding 18 percent last year and 11 percent in 2012, data compiled by Bloomberg show.
The yield on 10-year government bonds fell to an all-time low of 0.315 percent on April 5, 2013, a day after the Bank of Japan unveiled record stimulus, and was 0.558 percent today in Tokyo, still the lowest globally. The Topix index of shares slid 2 percent this year after surging 51 percent in 2013.
“The GPIF reform is quite advanced to get some diversification out of Japanese government debt,” said Ken Peng, a strategist at Citigroup Inc.’s private bank in Hong Kong. “The size is very substantial. You want to be following their money and Asian credit is one attractive destination.”
While Japanese investment in Asian debt won’t completely offset the impact of a pullback by investors attracted to higher interest rates in the U.S., they can help moderate any shock, according to ADB’s Ng.
“Greater interest by Japanese investors in other Asian bond markets should help push down yields,” he said.
South Korea’s 10-year government bond yield fell to a one-year low of 3.17 percent yesterday. Similar-maturity notes in Singapore yielded 2.33 percent, down 23 basis points from the end of 2013, while the yield on Malaysian debt slid nine basis points to 4.04 percent. Malaysia reported today foreign ownership of its local debt rose to a record $78 billion in May.
Whale in Pond
“There are lots of Japanese investors who are keen to invest, but there aren’t enough high-grade bonds in this region,” Satoshi Okagawa, a global markets analyst at Sumitomo Mitsui Banking Corp. in Singapore, said in a June 26 phone interview. “You can’t put in a pond a whale that can only live in the sea.”
Japan is Asia’s biggest local-currency bond market with assets of $9.99 trillion as of end-2013, followed by China’s $4.7 trillion and South Korea’s $1.6 trillion, ADB data show. Singapore and Malaysia are the only Asian markets outside Japan included in Citigroup Inc.’s global investment-grade bond index that GPIF uses as a benchmark for overseas debt investments.
Japan’s population will decrease 11 percent to 113 million by 2034 from 127 million this year, according to estimates from the National Institute of Population and Social Security Research. Direct investment abroad by Japanese companies was 1.25 trillion yen in the first quarter, taking the total to a record 66 trillion yen, Bank of Japan data show.
“Investment returns will decrease in a shrinking population as the economy struggles to grow,” Masaru Hamasaki, a Tokyo-based senior strategist at Sumitomo Mitsui Asset Management Co., which manages the equivalent of $132 billion, said in a June 26 phone interview. “Money will inevitably flow out of mature countries” like Japan, he said.