Japan’s Pension Fund Cutting Local Bonds to Buy Equities

Japan’s public pension fund, the world’s biggest manager of retirement savings, said it will reduce its holdings of local bonds and buy more shares.

The proportion of assets held in Japanese bonds will be cut to 60 percent from 67 percent, the health ministry said yesterday in Tokyo at a briefing to announce changes to the mid-term plan of the Government Pension Investment Fund. The weighting of local shares will be increased to 12 percent from 11 percent currently. The Health and Welfare Ministry, which oversees pensions, didn’t give a time frame for the changes.

“It was a negative factor as far as bond supply and demand is concerned,” said Makoto Suzuki, a bond strategist at Okasan Securities Co. in Tokyo, one of the 24 primary dealers obliged to bid at government debt sales.

GPIF’s shift toward higher-yielding assets comes as it prepares to fund retirements in the world’s most elderly population and Prime Minister Shinzo Abe tries to revive the economy through fiscal and monetary stimulus. Domestic shares have slid since Abe said on June 6 that a legislative campaign to loosen rules on businesses, the “third arrow” of his economic plan, won’t begin for months.

Changes to GPIF’s asset allocation are effective from yesterday, fund official Masahiro Ooe told reporters. He declined to elaborate on the timing for completion of the portfolio changes.

Investing Abroad

Allocations to foreign bonds will rise to 11 percent from 8 percent, while overseas shares will increase to 12 percent from 9 percent, according to a document on GPIF’s website.

Nikkei 225 Stock Average futures in Chicago rose the most in two months last night, with the June contract gaining 4.1 percent to 13,240. The Nikkei 225 fell 0.2 percent in Tokyo yesterday to 12,877.53, while the broader Topix index slid 1.3 percent and is down about 17 percent from its May high.

GPIF, created in 2006, managed 112 trillion yen ($1.16 trillion) as of Dec. 31. It didn’t alter the structure of its holdings during the worst global financial crisis in 80 years or in response to Japan’s 2011 earthquake and nuclear disaster.

In an interview in February, GPIF President Takahiro Mitani the fund may have to reduce its bond holdings and buy alternative assets to cope with a higher interest-rate environment under Abe. After a review in April-to-May, any portfolio changes would begin in early 2014, he said at the time.

Yields Rise

Yields on 10-year Japanese government bonds increased 2 1/2 basis points to 0.86 percent in Tokyo, according to Japan Bond Trading Co. Futures on the notes recovered from a drop in the afternoon to close at 143.11 on the Tokyo Stock Exchange, the highest since May 10.

“The reaction we have seen in the futures market has been muted,” said Teruyoshi Sotome, a Tokyo-based senior bond strategist at Mizuho Securities Co., one of the 24 primary dealers obliged to bid at government auctions. “We shouldn’t forget the change in GPIF’s portfolio is going to take place over the long term. The announcement is not a declaration that they are going to increase foreign investments by large amounts going forward.”

Japanese households had 1,547 trillion yen in financial assets as of the end of December, according to Bank of Japan data. That compares with 32 trillion yen of debt securities and 106 trillion yen in equities and investments, the data show.

BOJ Buys

Even as GPIF reduces its allocation to JGBs, the Bank of Japan has stepped up purchases. The BOJ said in April it would double monthly buying of JGBs to more than 7 trillion yen, and in May said it would increase the frequency of the operations.

JGBs have lost about 1.64 percent so far this quarter, the most since the period ended September 2003, according to a Bank of America Merrill Lynch index.

Domestic bonds made up about 60 percent of GPIF’s assets at the end of December, according to a document on its website. The fund is amending its targets to bring them into line with the changing value of its holdings, said Hideo Shimomura, who helps oversee the equivalent of $62 billion in Tokyo as chief fund investor at Mitsubishi UFJ Asset Management Co., a unit of Japan’s largest publicly traded bank.

“They don’t have to touch their assets,” Shimomura said. “I don’t think this news could affect markets.”