Political Pressure Made Panel Raise GPIF Goal, Member Says

Japanese politicians railroaded an advisory panel into urging the nation’s $1.26 trillion retirement fund to increase returns, a strategy aimed at boosting stocks, according to one of the committee members.

The committee gave optimistic economic assumptions more weight when deciding on the return goal for the Government Pension Investment Fund because of pressure to affirm that Prime Minister Shinzo Abe’s policies would work, and didn’t fully discuss the consequence of them failing, Kazuhiko Nishizawa said. GPIF, the world’s biggest pension fund, has more than half its assets in domestic bonds and is under pressure to revamp its strategy as Japan’s population ages and the central bank seeks to spur inflation.

“It looks like they’re using GPIF as a tool to buoy the stock market,” Nishizawa, an economist at Japan Research Institute Ltd., said in an interview in Tokyo on March 14. “Politically, there was no option of setting a lower return target for GPIF. There was no room to move. Normally the health ministry would’ve said ‘don’t worry about outside pressure when reviewing pension finances,’ but it seems it’s become a completely political matter.”

Japan’s Topix index of equities fell 10 percent this year, the steepest drop among 24 developed-market gauges, as the yen strengthened and investors weighed whether Abe would succeed in spurring a sustainable economic recovery. Nishizawa’s panel said this month that GPIF should earn a return of 1.7 percent plus wage growth. The group’s preferred economic scenario implies a nominal target for the fund of 4.2 percent, up from a 4.1 percent goal set five years ago.

Abe Speech

“Japan’s public fund management will also change a great deal,” Abe said in a speech in Davos, Switzerland in January. “Japan’s Government Pension Investment Fund now holds about 1.2 trillion U.S. dollars. We will press ahead with forward-looking reforms, including a review of that portfolio.”

Pressure on GPIF to boost returns has been led by Takatoshi Ito, who headed a separate panel handpicked by Abe advising on public pensions last year.

GPIF should put half its assets in stocks and seek a 5 percent yearly return, Ito said in a Feb. 14 interview in Tokyo. Buying more shares would benefit Japan’s public as well as boost equity markets, he said March 4.

The Topix rose 1 percent to 1,165.94 today, halting a four-day losing streak.

‘Political Factors’

“The setting of GPIF’s return targets was led by political factors rather than economic theory,” Nishizawa said. “There is pressure on GPIF to increase risk assets, and the market saw this as a reason to buy. The decision on the return target was made in this context. The proper way of discussing things would have been to keep outside voices outside.”

Ito also said the law governing GPIF needs to change to allow the fund more autonomy from bureaucrats. Lawmakers should pass a bill to alter the legislation as soon as this current parliamentary session, which runs through June 22, Yasuhisa Shiozaki, the ruling Liberal Democratic Party’s deputy policy chief, said in January.

GPIF should seek yearly returns of 1.7 percent plus the rate of pay increases for workers, according to a finalized report on March 10 from the committee formed to help the health ministry decide on economic assumptions for investment targets.

The panel’s report included eight economic scenarios. The most preferred case is based on cabinet office figures for the outlook based on Abe’s revitalization strategy, which includes a forecast for an increase in workers.

No Deviating

The ministry has no plans to deviate from the panel’s recommended return goal, Kotaro Mori, an official at the department that oversees GPIF, said in an interview on March 6.

In preparing the review, the health ministry has done just enough to appear to agree with Abe’s plans to make GPIF take on more risk while refraining from suggesting radical changes, Nishizawa said.

“By increasing the return goal by 0.1 percentage point, they can say they responded to pressure from the prime minister’s office,” Nishizawa said. “But when you take inflation assumptions into account, the target hasn’t increased.”

The new return goal assumes consumer prices will increase at a 1.2 percent rate, compared with a 1 percent projection in 2009. That means the real return target is 0.1 percentage point lower than five years ago.

Difficult Target

Still, the proposed new return goal may be difficult for GPIF to achieve, according to Nishizawa.

The fund’s “results would have been able to beat a wage growth-based target until now, but that’s because wage growth was negative,” he said. “If salaries rise, can they really guarantee a return rate of 1.7 percent higher than that?”

GPIF and its predecessor achieved average returns since 2001 of 2.76 percent more than nominal wage growth, the health ministry’s Mori said at a conference in Tokyo on March 14.

Japan’s salaries increased for the first time in almost two years in January, the health ministry said March 4. Based on negotiations across 43 union groups, companies agreed to increase base wages by an average of 1,950 yen ($19) a month in the coming year, the Japanese Trade Union Confederation, known as Rengo, said March 12.

Labor cash earnings including bonuses and overtime, the benchmark for wages, had fallen in three of the four years from 2009 through 2012 and were unchanged in 2013, according to the health ministry.

Five-Yearly Review

Japanese bonds accounted for 55 percent of GPIF’s portfolio at the end of December, the smallest share since the fund was established in its current form in April 2006. GPIF held 17 percent of its assets in local shares last quarter, 15 percent in foreign equities and 11 percent in overseas bonds, according to a statement on its website.

With the five-yearly financial review scheduled to be completed this year, investors are watching whether the allocation to local debt will be cut further.

“It’s extremely important to make sure the pension finance review is neutral and not under pressure from politics,” Nishizawa said.

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