JGB Selloff Looms as Post Office Joins GPIF’s Cuts: Japan Credit

Prime Minister Shinzo Abe’s success in spurring inflation risks triggering a Japanese government bond selloff as the second-biggest JGB holder may begin switching to higher-yielding assets.

Japan Post Holdings Co. sold an unprecedented 15.7 trillion yen ($154 billion) of the notes in the fiscal year ended March 31. It has about 178.9 trillion yen remaining. That’s more than double the total of all domestic bond holdings at Government Pension Investment Fund, the third-largest owner, which is shifting into stocks and overseas securities.

The appeal of notes that offer the world’s lowest yields is waning as Abe’s stimulus policies succeed in spurring the fastest consumer-price increases since 1991. Citigroup Inc. expects Japan Post’s units to offload as much as 63.8 trillion yen of the debt and increase the weight of equities as it readies for an expected listing next year. The postal service’s President Taizo Nishimuro may address the issue at a monthly press conference as early as next week.

“The portfolio review at Japan Post Bank and Japan Post Insurance will definitely follow the GPIF overhaul,” said Kazuhiko Ogata, the Tokyo-based chief Japan economist at Credit Agricole SA. “It’s the next big event that has the potential to shake the markets as they reduce JGB buying and boost stock and foreign debt holdings.”

JGB allocations at Japan Post Bank and Japan Post Insurance fell to a record low of 62.4 percent and 60.3 percent respectively last fiscal year, according to earnings statements. While GPIF doesn’t disclose a breakdown, its 71 trillion yen of domestic debt at the end of last year comprised 55 percent of total holdings.

GPIF Shift

All 10 fund managers, strategists and economists in a Bloomberg News survey expect the 128.6 trillion yen GPIF to reduce domestic debt, with six projecting a cut to 40 percent. The fund will boost its Japanese stocks target to 20 percent from the 17 percent it held at the end of 2013, according to the median estimate.

Japan’s government bonds returned 2.7 percent in the past year, compared with a 0.4 percent gain for U.S. Treasuries, Bank of America Merrill Lynch indexes show. The Nikkei 225 Stock Average gained about 18 percent including reinvested dividends.

“The Japan Post units are probably going full speed ahead with restructuring right now,” said Credit Agricole’s Ogata. “Unless they fix their bond-heavy portfolios, they could endanger the entire management when inflation takes hold and causes yields to spike.”

Taking Risks

President Nishimuro said in April Japan Post wants to list its banking and insurance units soon after the parent company’s offering, which he had earlier indicated may take place by April 2015. Nishimuro said at the time the company shouldn’t change its investment strategy and will keep its JGB holdings.

“Japan Post units have risks they can take and cannot take, so they wouldn’t simply follow GPIF,” said Ryutaro Kono, the chief Japan economist in Tokyo at BNP Paribas SA. “The government is telling GPIF to buy stocks to boost prices, but it’s not the case with Japan Post.”

Japan Post Insurance was established in October 2007 as part of the privatization of Japan Post, a state-run postal agency.

The central bank’s about 7 trillion yen of monthly debt buying in an effort to boost inflation to 2 percent has held down sovereign yields. The Bank of Japan is the biggest holder of JGBs.

Japan’s benchmark 10-year rate was 0.585 percent, falling 15 basis points this year. Analysts surveyed by Bloomberg forecast it will climb to 0.78 percent by the end of the year. One basis point is 0.01 percentage point.

Inflation Ramps

The yen’s 18 percent plunge last year, the sharpest annual drop since 1979, has helped boost price growth by increasing import costs. The currency traded at 101.96 per dollar as of 11:38 a.m. in Tokyo today.

Consumer prices excluding fresh food rose 3.2 percent in April from a year ago, equivalent to a 1.5 percent increase when the effects of a sales tax hike that month are excluded, according to the BOJ.

Some of the major insurance companies that are not state-owned are already seeking higher returns by investing in foreign debt. Nippon Life Insurance Co., Meiji Yasuda Life Insurance Co. and Sumitomo Life Insurance Co., announced plans in April in increase purchases this fiscal year.

Investing Overseas

“We are revising allocations as inflation picks up,” Takuro Nishida, a deputy manager who helps oversee about $20 billion of assets at Nipponkoa Insurance Co., said in an interview in Tokyo. “We are investing in short- to mid-term foreign bonds without currency hedges” in countries such as the U.S., U.K., Canada, Australia and in Europe, he said.

JGBs due in more than a year were the worst performers since Dec. 31 among the 26 debt markets tracked by Bloomberg and the European Federation of Financial Analysts Societies, gaining 1.3 percent. Government debt returned 2.9 percent in the U.S. and the U.K., and 3.9 percent in Australia.

“The risk is that there wouldn’t be any companies that will buy JGBs when the BOJ exit becomes closer,” said Yasuhide Yajima, the chief economist at NLI Research Institute in Tokyo. “I wouldn’t rule out a scenario where GPIF and Japan Post become the government’s wallet.”

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