Japan’s GPIF to Cut Local Bonds to 40%, Survey Says

The biggest-ever reshuffling of Japan’s Government Pension Investment Fund will result in the fund slashing its target for local bond holdings by a third to 40 percent of assets, according to analysts.

All 10 fund managers, strategists and economists in a survey by Bloomberg News this month expect the 128.6 trillion yen ($1.26 trillion) GPIF to reduce domestic debt, with six projecting a cut to 40 percent from the current 60 percent. Paring holdings to that level would involve selling bonds worth the equivalent of $192 billion, according to calculations by Bloomberg. GPIF will boost its Japanese stock target to 20 percent from 12 percent, the median survey prediction shows.

GPIF is facing pressure to take more risk as the Bank of Japan spurs inflation that risks eroding the value of the world’s lowest-yielding sovereign debt. Changes are expected soon, after the health ministry completes a five-year review of pension finances. Daiwa Securities Group Inc. says the shift will put a floor under slumping Japanese equities, while Credit Agricole CIB says flexibility in selling is needed to avoid a rout in bonds.

“The review of GPIF’s portfolio has become a political decision,” said Tomohisa Fujiki, head of interest-rate strategy at BNP Paribas Securities (Japan) Ltd. “They don’t want to have a big impact on the market, but they’ll be pressed to appear more aggressive and achieve allocation changes earlier to show a clear departure from their focus on domestic bonds.”

Survey Results

The median estimate for domestic bonds matches the recommendation of Takatoshi Ito, the head of a panel handpicked by Prime Minister Shinzo Abe that in November urged GPIF to seek higher returns and diversify its assets.

Targets for foreign bonds and overseas shares will be 14 percent and 17 percent respectively, according to the projections in the Bloomberg survey. That compares with the fund’s current targets of 11 percent and 12 percent.

GPIF’s holdings as of Dec. 31 consisted of 55 percent in domestic bonds, 17 percent in local shares, 15 percent in foreign equities, 11 percent in overseas debt and 2 percent in short-term assets.

Anticipation for a portfolio shakeup has mounted as GPIF awaits the health-ministry review and implements several of the government panel’s recommendations, including investing in infrastructure, adopting the JPX-Nikkei Index 400 as a benchmark for domestic stocks and removing a salary cap to enable hiring of in-house investment experts.

Governance Changes

Japan’s ruling Liberal Democratic Party is working on legislation that will overhaul the governance of the fund, including establishing a board of six or seven directors to oversee it, according to lawmaker Kozo Yamamoto, who’s in charge of preparing the bill. The law is unlikely to be submitted in the current Diet session that runs through June 22, he said.

GPIF is under pressure to seek higher returns as pension payouts surge for the world’s oldest population and accelerating inflation risks eroding the value of domestic debt. GPIF owned 71 trillion yen in Japanese bonds as of Dec. 31.

“They’ll change the portfolio in a bold way,” said Kazuhiko Ogata, chief Japan economist at Credit Agricole. “With domestic bonds, while the cut will be big, they’ll expand the deviation limits so they can make changes more slowly and prevent a yield spike.”

Fund Flexibility

GPIF’s asset managers can currently deviate from the 60 percent local bond target by as much as 8 percent, and the 12 percent domestic stocks target by 6 percent. They’ve used this flexibility to pare debt and boost equities, with the fund’s 17 percent in Japanese shares at year-end nearing the maximum it can hold. Widening the limits would give the fund more room to choose the best time to buy and sell assets.

Not everyone anticipates a drastic overhaul. Makoto Suzuki, a senior bond strategist at Okasan Securities Co., forecasts the new allocations will be 50 percent for local debt, 17 percent for domestic shares, and 14 percent each for foreign bonds and stocks.

“Their return target hasn’t changed much and that’s why I don’t believe they’ll boost local shares and overseas assets much,” Suzuki said. “Common sense tells you they’ll change asset allocations slowly so as not to affect the market. They’ll reduce local bonds by holding them until maturity and taking advantage of the Bank of Japan’s buying.”

Annual Target

For the period starting in fiscal 2024, GPIF should seek yearly returns of 1.7 percent above the rate of wage growth for workers, an advisory committee to the health ministry said in March. The ministry said it would probably accept this recommendation. The implied nominal return target of the group’s preferred scenario would be 4.2 percent, a small increase from a

4.1 percent goal set five years ago.

The BOJ’s purchases of about 7 trillion yen in sovereign bonds each month should keep yields from surging even after GPIF announces a cut in its bondholding target, said Kenji Shiomura, a Tokyo-based senior strategist at Daiwa Securities.

The fund’s shift toward domestic shares will underpin gains in the nation’s stock market, Shiomura said. The Topix was down 8 percent this year through yesterday after surging 51 percent in 2013. It slipped 0.2 percent as of 9:52 a.m. in Tokyo today.

“If they aim to put 20 percent into Japanese shares, that will trigger a knee-jerk reaction in the market,” said Shiomura, who forecasts the Topix index to rise to 1,400 by year-end. That would be a 17 percent gain from yesterday’s close. “After that, GPIF’s purchases will give the market a floor and help shares edge up.”

SA stands for short-term assets; alt for alternative
                 Local    Local    Foreign    Foreign  SA    Alt
                 Bonds    Stocks   Bonds      Stocks

Median 40 20 14 17 5 3

Company Allianz 40 22 16 20 2 Baring 35 20 15 18 2 10 BNP Paribas 40 22 11 22 5 Credit Agricole 40 22 14 14 5 5 Daiwa 40 20 12 20 5 3 JPMorgan Asset 40 18 5 Kokusai 40 20 16 17 2 Nomura 45 19 15 15 5 1 Okasan 50 17 14 14 5 Sumitomo Mitsui AM 52 18 8 15 5 2 Year-end forecast JGB10-Year Topix Dollar-Yen % Company Allianz 0.6 1,350 107 Baring 1.3 1,230 108 BNP Paribas 0.8 110 Credit Agricole 0.75 1,480 111 Daiwa 0.8 1,400 108 JPMorgan 0.5 Kokusai 0.6 1,400 105 Nomura 0.85 1,500 112 Okasan 0.8 110 Sumitomo Mitsui AM 0.7 1,200 103
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