GPIF to Curb Impact When Cutting Bonds, Yonezawa Says

Japan’s Government Pension Investment Fund, the world’s largest, will seek to limit the impact on domestic bond prices when reducing holdings, the head of its investment committee said.

The 126.6 trillion yen ($1.2 trillion) GPIF will carefully consider ways to avoid disrupting the market as it cuts domestic bonds and buys other assets, said Yasuhiro Yonezawa. Paring debt “on the quiet” before announcing changes in target weightings would be ideal, Yonezawa said. The fund’s asset review will probably be completed this autumn, and decreasing Japanese bonds to between 30 percent and 50 percent from the current target of 60 percent “doesn’t seem out of place,” he said.

GPIF is “a public entity, and needs to avoid unduly disrupting the markets as much as possible,” Yonezawa said in an interview in Tokyo yesterday. “We must think of this first. If we can move ahead of announcing the portfolio without causing waves in the market, that’ll be best.”

As GPIF weighs how to trim its 70.2 trillion yen pile of local debt, unprecedented Bank of Japan easing has pushed sovereign bond yields to the lowest in more than a year and volatility to the least on record. Japan’s government is putting pressure on the fund to accelerate the asset changes, with Prime Minister Shinzo Abe saying the overhaul is one of the country’s key economic growth strategies.

GPIF said last week it posted a 0.8 percent investment loss in the quarter through March, its first in almost two years, caused by a rout in Japanese stocks just as it moves toward buying more equities. For the year, the fund reported an 8.6 percent return, its third-highest since 2001, the statement on July 4 showed. Local bonds were GPIF’s only asset class that beat their benchmark over the year.

Market Expectations

The fund may increase its target for domestic equities from the current 12 percent to 20 percent and reduce its goal for local debt to 40 percent from 60 percent, according to a Bloomberg News survey of 10 fund managers, strategists and economists in May.

“The consensus is GPIF will cut bonds to about 40 percent, but investors haven’t fully priced in when this will be done,” said Tomohisa Fujiki, an interest-rate strategist at BNP Paribas SA in Tokyo. “If it’s brought forward more than the market expects, it could be a cause for higher yields in the second half of the year.”

The allocation changes aren’t decided, GPIF’s Yonezawa said. He declined to comment on whether the Bloomberg survey estimates were likely to be correct.

Sovereign Yield

Japan’s benchmark 10-year bond yield touched 0.54 percent yesterday, the lowest since April last year. Historical price volatility on the nation’s sovereign debt slid to a record low of 0.647 percent on June 30, according to data compiled by Bloomberg going back to December 1994. The Topix index, a benchmark for Japanese equities, lost 0.9 percent to 1,259.25 in Tokyo today.

A Nikkei newspaper article on June 3 cited Yonezawa as saying GPIF will announce a schedule for buying and selling assets to meet its new target weightings, as the fund has the responsibility to disclose this. There is a risk of small losses by doing so, he was quoted as saying.

GPIF should avoid buying into markets that have rallied on bets its purchases will boost prices, Takatoshi Ito, who led a panel that advised the government on overhauling the fund last year, said in a June 19 interview.

The fund hasn’t decided whether to make changes to its portfolio before announcing the new allocations or afterward, Yonezawa said yesterday.

“It depends on the size of the portfolio change,” he said. “If we can do it on the quiet, that would be ideal, but it may not be possible. We need to do what we can to limit market disruption.”

(Closes today’s stock move in ninth paragraph.)
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