GPIF Law Change Can Wait Until After Asset Review, Kihara Says

A law to transform how the world’s biggest pension fund is run can wait and may even be shelved, said a ruling-party official, contradicting his deputy policy chief who called it the top priority.

Prime Minister Shinzo Abe’s regime can achieve adjustments at Japan’s 126.6 trillion yen ($1.2 trillion) Government Pension Investment Fund even without formal amendments to the law governing it, said Liberal Democratic Party lawmaker Seiji Kihara. The bill, expected to add a board of directors to lead the fund, can be submitted after GPIF alters its asset allocations, said Kihara, who worked on it. LDP deputy policy head Yasuhisa Shiozaki has said the law must come first.

GPIF is facing parallel sources of upheaval: the governance bill being weighed by politicians, and the fund’s internal review of its bond-heavy investment strategy. The bill should be submitted in the next parliamentary session, before GPIF increases risk assets, according to Shiozaki. Kihara’s comments suggest the asset review is likely to come first.

“The government thinks the decision on the law can wait until it sees the results of the steady changes” already taking place at GPIF, such as reviewing the portfolio, improving the investment committee and reworking wage caps to draw more investment professionals, Kihara said in an interview in Tokyo on Aug. 12. “We’ll change the law if and when needed, and we won’t do so if we decide it isn’t required.”

A panel led by Takatoshi Ito that advised Abe’s administration on overhauling GPIF said in November the fund must revise its assets and fix its governance at the same time. It called on GPIF to install a collegial decision-making body to replace the system in which power lies with the president.

Not Submitted

The law to change the fund’s structure wasn’t submitted in the Diet session that ended in June, with Kozo Yamamoto, the LDP lawmaker in charge of preparing it, saying in May he still needed to get other members of the ruling coalition on board. Even as the bill was delayed, Abe ordered the review of GPIF’s asset mix to be sped up.

“We have to fix GPIF’s governance structure in the extraordinary session and then rework its portfolio,” Shiozaki said at a Bloomberg seminar on Aug. 5. “Governance reform is paramount and it’s important to get it done before the weightings get changed this fall.”

Changes in the bill may also include allowing direct investments in a broader range of assets, as well as the creation of risk and governance committees, Yamamoto said in May. Under the current system, decision-making power is concentrated with GPIF President Takahiro Mitani and the health ministry, while the fund is barred from buying stocks directly.

Natural Overhaul

“The market keeps saying ‘change the law, change the law,’ but I think if the reforms are done one by one, the overhaul will come about naturally,” Kihara said. “If things don’t move forward, then we can change the law.”

Many of the improvements recommended by Ito’s panel can be carried out before amending the law, according to Kihara. A cabinet decision in December allowed GPIF to increase its wage limit so it can hire more fund-management experts. Last week more power was given to GPIF’s investment committee, with changes to the fund’s portfolio requiring prior approval from the group.

“The things the government can’t do without changing the bill are items like creating a risk management committee which has legal authority, or drastic changes to the wage structure,” he said. “But the portfolio can be changed,” and committees can be created even if they don’t have the final say under law, he said.

More Stocks

GPIF plans to increase its domestic stock allocation to more than 20 percent from its current target of 12 percent, Reuters reported on Aug. 7, citing unidentified government and ruling party officials. No decision has been made yet, Mitani said in response to the report.

GPIF may increase equities to 20 percent and reduce bonds to 40 percent, according to a Bloomberg News survey of 10 fund managers, strategists and economists in May. 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.

“My intuitive sense is a 20 percent allocation to domestic shares is too high,” Kihara said. “But the initial argument was to diversify assets widely, including in domestic stocks, foreign equities, REITs and venture capital. They should decide what risk they want to take and then what goes in the portfolio. It’s not simply about investing in stocks just because the market may rise.”