Panel Says Japan’s GPIF Should Consider Management Changes

Japan’s Government Pension Investment Fund, the world’s largest manager of retirement savings, may need to alter the way it makes investment decisions as it seeks to diversify its portfolio, according to an expert panel advising on public investments.

The current management structure, wherein GPIF’s president makes most of the decisions, may hinder the fund from reallocating investments and improving governance, Cabinet Office official Shunsuke Shirakawa told reporters in Tokyo today. The panel held its sixth meeting today and will likely gather two more times before issuing its final recommendations next month, Shirakawa said.

GPIF needs to reduce the risk of losses on its bond holdings should interest rates start to rise as the economy improves, panel chair Takatoshi Ito said in an Oct. 4 interview.

An interim report from the group on Sept. 26 showed some members wanted the 121 trillion yen ($1.23 trillion) GPIF to add new assets such as real-estate trusts, infrastructure and private-equity investments and commodities.

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 benchmark 10-year Japanese government bond yield rose one basis point to 0.665 percent today, still the lowest worldwide. The yen slid 0.1 percent to 98.66 per dollar as of 10:56 a.m. in London.

‘Plausible’ Target

The central bank’s inflation goal “is plausible” and the government pension fund “should be using this as their main scenario,” Ito, who is the dean of the Graduate School of Public Policy at the University of Tokyo, said in the Oct. 4 interview.

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.”

Bond Losses

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, according to Ito, who didn’t speak to reporters after today’s meeting.

The pension fund announced earlier this month that 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.

At today’s meeting, the panel said that an earlier plan to move GPIF’s headquarters to Kanagawa prefecture, south of Tokyo, by March 2015 should be revised, as doing so could impact how the fund communicates with market participants.

The advisory group also discussed the formation of so-called baby funds of assets broken out from GPIF’s holdings. Earlier this month, Ito said he personally agreed with that idea.

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