GPIF Plans Infrastructure Investment, Cuts Japanese Bonds

Japan’s Government Pension Investment Fund, the world’s largest pool of retirement savings, cut domestic bond holdings to the least since the fund’s inception in 2006 and said it will invest in infrastructure.

Japanese bonds accounted for 55 percent of the fund’s portfolio at the end of the quarter ended December, shrinking from 58 percent in the previous period and the smallest share since GPIF was established in its current form in April 2006. The fund will put as much as $2.7 billion into infrastructure over the next five years, it said at a briefing in Tokyo today. Assets swelled to a record 128.6 trillion yen ($1.26 trillion) as of Dec. 31 as the fund earned a 4.7 percent quarterly return, GPIF said in a separate statement.

“It’s a fact that GPIF needs to take risk to some degree in order to raise returns,” said Kenji Shiomura, a Tokyo-based senior strategist at Daiwa Securities Group Inc., Japan’s second-largest brokerage. The infrastructure investment “is a good thing. Shifting from its emphasis on JGBs and diversifying into various assets will reduce risk. I think others will follow GPIF’s move.”

The pension fund is under pressure to overhaul its investment strategy as Prime Minister Shinzo Abe and the Bank of Japan seek to revive the world’s third-biggest economy and exit deflation. GPIF must find a way to manage its money flexibly as well as broaden investments, Abe said to parliament on Feb. 24. The fund’s basic stance is to diversify its assets, GPIF President Takahiro Mitani said in response.

Infrastructure Partnership

GPIF will form a partnership with Development Bank of Japan Inc. and Ontario Municipal Employees Retirement System to make the infrastructure investments. Omers returned an average 11 percent annually between 2009 and 2013 through such investments, GPIF said.

The fund may cut its foreign debt holdings to raise the cash for the infrastructure investment, Tokihiko Shimizu, director general for the research department at GPIF, said at today’s briefing. Such debt comprised 11 percent of the fund’s holdings as of Dec. 31. It won’t be long until the first investment, Shimizu said, without being more specific.

Investment in infrastructure has the benefit of stable income gains, higher yields than those typically generated from bonds and are less affected by public-market volatility, GPIF said.

Bonds, Stocks

GPIF’s domestic bond investments returned 0.2 percent last quarter as its Japanese stocks delivered 9.2 percent, according to the fund’s statement. Foreign debt gave a return of 8.2 percent while overseas equities delivered 16.2 percent.

GPIF held 17 percent of its assets in local shares last quarter, up from 13 percent a year earlier. The quarterly return was the biggest since a 6.9 percent gain in the period ended March 31, 2013. Assets increased from 124 trillion yen as of Sept. 30.

The pension fund’s target allocation to domestic bonds is 60 percent, with asset managers given permission to deviate from this by as much as 8 percent. GPIF’s target for local stocks is 12 percent, with a 6 percent deviation limit. The allocations will probably change in the middle of the year after the health ministry finishes its pension review, Takatoshi Ito, the head of a panel that last year advised the government on the overhaul of public pension funds, said in a Feb. 14 interview.

Reduce Bonds

GPIF should put half its assets in equities and reduce bond holdings to about 40 percent within two years, Ito said. The Ministry of Health, Labor and Welfare, which oversees GPIF’s budget, investment strategy and hiring, sets new targets for pension funds every five years based on the outlook for returns needed over the next 100 years to fund payouts.

The Topix index surged 9.1 percent in the final three months of 2013 to cap a 51 percent annual gain, the most since 1999. The gauge tumbled 7 percent this year, the most among developed-market benchmark measures.

“The results were within expectations and didn’t move the JGB market or the dollar-yen,” Keiko Onogi, a senior Japanese government bond strategist at Daiwa Securities Group, said by phone. “It’s been said that the higher stocks go, the lower the percentage of bonds will be.”

The Bloomberg Japan Sovereign Bond Index rose 0.2 percent last quarter, with gains decreasing from 1.5 percent in the prior period. The central bank is holding down yields in the world’s most indebted nation by buying more than 7 trillion yen of debt a month as it seeks to spur inflation of 2 percent.

Consumer Prices

Japan’s consumer prices excluding fresh food rose 1.3 percent in January from a year earlier, the statistics bureau said today in Tokyo, matching the highest level since 2008. Rising prices cut the value of fixed payments from bonds while boosting the allure of growth-sensitive assets such as equities.

The BOJ will fail in its 2 percent inflation goal, Mitani said in an interview in December. The fund should not be used as a tool to push up stock prices and pressure to do so is unfair on a institution independent of the government since 2006, he told the Financial Times newspaper this month.

Still, GPIF won’t add to its holdings of JGBs because it sees “very limited room” for prices to rise as inflation accelerates, Mitani said in an interview in Davos, Switzerland on Jan. 24.

The fund needs autonomy from the health ministry immediately and lawmakers should submit a bill to make the fund more independent during the current parliamentary session, which runs through June 22, Yasuhisa Shiozaki, the ruling Liberal Democratic Party’s deputy policy chief, said last month.

(Updates with strategists’ comments from third paragraph.)
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