GPIF Investment Committee Member Opposed CPI-Linked Bonds

A member of the investment committee for Japan’s government pension fund, the world’s biggest retirement savings pool, opposed the purchase of inflation-linked bonds, minutes of the group’s meeting last month show.

Debt that protects buyers against consumer-price gains doesn’t shield them from credit risk or rising real interest rates, and the market for such notes in Japan isn’t mature enough, one Government Pension Investment Fund committee member said in minutes of a Jan. 20 meeting released today on the 124 trillion yen ($1.2 trillion) fund’s website. GPIF should buy inflation-linked bonds as they reduce risk for funds that hold debt until maturity, another investment committee member said.

GPIF is considering purchasing the bonds to protect against rising prices, President Takahiro Mitani said in a Dec. 4 interview in Tokyo. Inflation in Japan is accelerating as the central bank buys about 7 trillion yen of debt a month to spur targeted price gains of 2 percent. GPIF, which owned 71.9 trillion yen of domestic nominal bonds as of Sept. 30, is under pressure to cover payouts as more Japanese baby boomers born in the wake of World War II turn 65 years old and become eligible for pensions.

“Considering we’re at the beginning stages of rising prices, holding some inflation-linked bonds is what GPIF should be doing,” said Ayako Sera, a Tokyo-based market strategist at Sumitomo Mitsui Trust Bank Ltd., which manages the equivalent of $474 billion in assets. “Pension money is what we need to live on in the future. If you just have bonds with low rates, it’s not going to be able to keep up with rising prices.”

Linker Rally

The Ministry of Finance resumed selling the notes known as linkers in October after suspending offerings for five years as deflation sapped investor demand. Linker trading between institutions reached 52 billion yen in January, surpassing the monthly average from fiscal 2009 to 2013, according to Mitsubishi UFJ Morgan Stanley Securities Co.

Japan’s sovereign inflation-linked bonds handed investors a 4.8 percent return in the year through yesterday as Prime Minister Shinzo Abe’s stimulus spurred consumer-price increases that exceeded expectations, Bank of America Merrill Lynch index data show. Nominal government debt returned 2.4 percent.

The price of CPI-linked bonds due September 2023 rose to 107.046 yen as of 3 p.m. local time today, the highest since they were sold in October, according to data compiled by Bloomberg.

The nation’s consumer prices excluding fresh food increased 1.3 percent in December from a year earlier, the statistics bureau said Jan. 31 in Tokyo. Data for January is due this week.

Panel Advice

GPIF should consider investing in inflation-linked bonds as the economy exits deflation, an expert panel headed by Takatoshi Ito that advised the government on the overhaul of the pension fund said in its final report in November.

The fund is considering buying such debt, while monitoring whether the market is large enough to avoid being distorted by GPIF’s potential buying, Mitani said on Dec. 4. The health ministry said in December that GPIF will start investing in local inflation-linked bonds after April, according to a statement on its website.

The average yield on the Bank of America Merrill Lynch Japan Inflation-Linked Government Index dropped to minus 2.12 percent yesterday, the least since the index data started in 2004.

Favorable Market

Inflation bond prices rose after GPIF said it may buy the notes and the fund needs to make it clear it will only invest if the market is favorable, one investment committee member said, according to the minutes released today.

The asset class should be used to diversify and it’s a good idea to gradually invest while monitoring the development of the market and its prices, another group member said. In the U.S., inflation-liked bonds are working as a hedge against rising prices, according to an investment committee member.

Nine investment committee members, headed by University of Tokyo professor Kazuo Ueda, attended the meeting. The minutes don’t specify who said what.

At least one GPIF executive officer and health ministry official were also there, the minutes show, without being more specific. The health ministry oversees GPIF’s hiring and investment strategy.

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