BOJ Can Help Bond Market Withstand GPIF Sales, Bank Lobby Says

The Bank of Japan holds the key to stabilizing the government bond market once the country’s largest pension fund starts selling its holdings, according to the nation’s bank lobby.

“If the BOJ maintains its easing, the market will be able to absorb the impact of the GPIF’s bond sales in its portfolio rebalancing,” Nobuyuki Hirano, chairman of the Japanese Bankers Association, said at a news conference in Tokyo today.

The Government Pension Investment Fund is facing pressure to shift away from sovereign debt as Prime Minister Shinzo Abe strives to spur inflation that would erode the value of the fixed-income securities. Domestic lenders have already begun trimming their JGB holdings to the lowest level in four years to mitigate the risk of losses if yields surge.

“Private banks are reducing JGBs because they sense that inflation will emerge at some point, although they’re still trying to find out if that’s really the case,” said Ryutaro Kono, chief Japan economist at BNP Paribas SA in Tokyo.

When asked what lenders will do with their government bonds amid the GPIF review, Hirano said they adjust their portfolios depending on market conditions. “We need to be prepared for various scenarios,” he said.

GPIF, which needs to boost returns as pension payouts surge for the world’s oldest population, will probably cut its target for local bond holdings to 40 percent from 60 percent of assets in its portfolio review, a Bloomberg survey of 10 fund managers, strategists and economists showed last month.

Reduced JGBs

The 128.6 trillion-yen ($1.3 trillion) fund will probably raise targets for foreign stocks to 17 percent and foreign bonds to 14 percent, from 12 percent and 11 percent respectively, according to the estimates. GPIF held 71 trillion yen in Japanese bonds as of Dec. 31, according to an investment report posted on its website.

Japan’s lenders, which loaded up on debt as loan demand stagnated in recent years, started to curb their JGB holdings in the wake of unprecedented monetary easing by the Bank of Japan. They held 130.9 trillion yen of the bonds in April, the least since February 2010, Bank of Japan data show.

The BOJ has been buying about 7 trillion yen of sovereign notes each month, as part of a strategy announced in April last year to achieve 2 percent inflation.

“There hasn’t been much confusion in the market as JGBs shift from banks into the BOJ’s portfolio,” said Hirano, who is also president of Mitsubishi UFJ Financial Group Inc., the country’s largest lender.

The central bank estimated in April that a one-percentage-point increase in JGB yields would cause the biggest banks to incur as much as 2.9 trillion yen in unrealized capital losses. Japan’s benchmark 10-year bond yielded 0.585 percent today, the least in the developed world.

Mitsubishi UFJ cut its domestic government debt holdings by 17 percent to 40.4 trillion yen in the year ended March 31 as profit from bond trading slumped, company data show.

Sumitomo Mitsui Financial Group Inc., the second-biggest bank by market value, reduced holdings at its main banking unit by 54 percent to 9.5 trillion yen. Mizuho Financial Group Inc. trimmed the securities by 29 percent to 21.8 trillion yen.

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