Japan’s GPIF Needs to Start Selling Bonds Now, Ito SaysAnna Kitanaka and Shigeki Nozawa
The world’s biggest retirement fund needs to cut local debt holdings now because Japan’s government will follow an advisory panel’s recommendation that the wealth manager seek higher returns, the panel’s head said. Bonds fell.
The 124 trillion yen ($1.22 trillion) Government Pension Investment Fund should pare domestic debt immediately to 52 percent of assets, its lower limit, in part by selling to the Bank of Japan, said Takatoshi Ito, chairman of the advisory group. The investments comprised 58 percent of the fund’s holdings as of Sept. 30.
“GPIF needs to start reducing bonds as soon as possible,” Ito said in an interview in Tokyo today. “Now is the right time to sell, while the BOJ is buying.”
The comments show a rift between Ito, an academic handpicked by Prime Minister Shinzo Abe to help overhaul Japan’s state-backed pension plans, and Takahiro Mitani, president of GPIF since 2010. The central bank, which is buying more than 7 trillion yen of bonds a month, will fail in its goal of spurring 2 percent inflation and the risk of owning so much domestic debt was overstated by Ito’s panel, Mitani said this week.
“Mr. Ito clearly has the ear of the Prime Minister, which perhaps means that over a period of time, his views will prevail,” said Jonathan Allum, a strategist for SMBC Nikko Capital Markets Ltd., in a telephone interview from London. “But Mr. Mitani is the man that actually runs GPIF and it doesn’t look like he is very keen to change things any time soon.”
The yield on the nation’s 10-year sovereign bonds touched 0.68 percent after Ito’s remarks, the highest since Oct. 1. Futures on notes due in a decade sunk to 144.34, the lowest since Oct. 16. The yen weakened to as low as 102.17 per dollar from 101.81 before the comments.
GPIF would have to sell about 7.5 trillion yen of local bonds to pare its holdings to 52 percent of its assets, according to calculations by Bloomberg based on the fund’s assets as of Sept. 30.
“GPIF is being bullied into reducing their bond holdings while all other private funds including insurance firms have been raising their bond portion and lowering stocks,” said Amir Anvarzadeh, a manager of Japanese equity sales at BGC Partners Inc. in Singapore. “JGB holdings are one area they can have a very large impact, and yields are shooting up right now.”
The Topix index reversed declines of as much as 0.3 percent to close 0.5 percent higher after Ito said GPIF should boost holdings of Japanese stocks to its upper limit of 18 percent.
GPIF needs to hold investments that can provide higher returns as retirement payouts for the world’s oldest population rise, according to the report from Ito’s panel published Nov. 20. The fund should consider investing more in overseas assets, private equity, commodities, infrastructure and real-estate investment trusts, the panel said.
The Ministry of Health, Labor and Welfare will enact the panel’s advised changes, said Kotaro Mori, manager of investments for the government department that oversees public pension plans including GPIF.
“The panel’s report has very valuable recommendations,” Mori said by phone from Tokyo. “We will seriously consider and then implement these changes with GPIF, in light of the economy heading toward an exit from deflation.”
Mitani said in a Dec. 4 interview with Bloomberg News that inflation is less of a risk to GPIF than many people, including Ito, assume, because the fund is a long-term investor and can hold bonds until redemption. Consumer-price increases will probably stay between 0.1 percent and 1 percent, missing the BOJ’s 2 percent target, he said.
Mitani “doesn’t seem to understand that it’s about mark-to-market valuation,” Ito said today.
If GPIF doesn’t start reducing its holdings before inflation takes root in Japan, the fund will exacerbate a slump in bond prices by needing to sell as demand from other investors wanes, Ito said.
“If inflation reaches 2 percent, and yields rise to 3 percent, and then they start trying to sell domestic bonds, we’ll see disaster in the markets,” he said.
With the budget and figures for pension payments due to be announced in March, GPIF should be able to design a new core portfolio by the middle of 2014, Ito said. His personal recommendation would be for as little as 35 percent of assets to be placed in local bonds, he said.
Japan’s Topix index advanced 62 percent in the 12 months through Sept. 30 for the biggest gain among global developed markets and the measure’s steepest rally in four decades. Domestic sovereign bonds handed investors a 1.8 percent return, an index compiled by Bloomberg shows. GPIF’s assets increased by 15 percent in the same period, according to its financial statements.
The changes proposed by the pension panel “will support and lift stock prices,” Ito said, adding that the panel’s main objective is to boost returns for the Japanese populace. “And by buying foreign assets, it will support a weakening yen. This isn’t a bad thing for the current state of Japan’s economy. It’s not going to create a bubble.”
The fund owned 71.9 trillion yen of domestic debt as of Sept. 30, according to its quarterly report. The nation’s consumer prices excluding fresh food, the BOJ’s gauge for its inflation target, increased 0.9 percent in October from a year earlier, government figures showed Nov. 29. A gauge of prices that also excludes energy rose 0.3 percent.
The BOJ, led by Haruhiko Kuroda, has signaled a willingness to add more cash to the economy to reach the inflation target.
“If GPIF are saying they will not reduce their huge bond holdings, they’re saying they don’t believe in inflation of 2 percent and they don’t believe in the government’s policies,” Ito said. “Foreign investors are getting confused. They think ‘isn’t this weird? Isn’t it a government organization?’ One of them must be wrong -- either Abenomics is a mistake, or GPIF is going to see losses.”
For SMBC Nikko’s Allum, the dispute highlights Abe’s attempts to shake up Japan’s bureaucracy and change the outlook of a nation where deflation has been entrenched for almost a generation.
“There is a general Abenomics push to change mindsets and particularly the mindset of the ‘power elites’,” Allum said. “It’s generally accepted that a lot of what drives inflation or deflation is expectations. It’s a battle you win in the mind, and on various fronts, including the BOJ and within the GPIF.”