Yen to Weaken After Pension Fund Reforms, Panel Adviser Ito Says

The yen will weaken as Japan’s public pension, the world’s biggest retirement fund, moves to become more competitive, according to Takatoshi Ito, who led a panel advising the government on overhauling the system.

The Government Pension Investment Fund, which invested about 55 percent of its 126.6 trillion yen ($1.2 trillion) in assets under management in Japanese bonds as of March, may buy more equities after a strategy review ends, the former Ministry of Finance official said. The review, which may be completed the next few months, also covers governance.

“The relative increases in Japanese equities, foreign equities, foreign bonds are not known yet, but on balance I would say Japanese equity prices will be positively impacted and the Japanese yen will be impacted on the depreciation side,” said Ito, speaking after a presentation at “Bretton Woods 2014: The Founders and the Future,” a conference hosted by the Center for Financial Stability in New Hampshire. It’s the same hotel where representatives from around the world met in 1944 to reshape the financial system.

Prime Minister Shinzo Abe is seeking to spur better returns at GPIF by having the fund buy more risky assets as the nation’s aging population puts pressure on pension payouts.

Changes to GPIF’s allocations may weaken the Japanese currency by as much as 6 yen per dollar, Daisaku Ueno, the Tokyo-based chief currency strategist at Mitsubishi UFJ Morgan Stanley Securities Co. said last month. A weaker currency may also help to boost price gains and bolster exports.

Yen Appreciation

The yen has gained 0.5 percent against the dollar this year and advanced 2.6 percent against a basket of 10 developed-nation currencies. The yen will decline to 105 per dollar by Dec. 31, according to the median estimate of analysts polled for Bloomberg News. The currency traded at 104.84 yen per dollar at 3:10 p.m. in New York.

The Bank of Japan has refrained from adding to its 60 trillion yen to 70 trillion yen of annual asset purchases this year, after pumping cash into the system in 2013 to battle the risk of deflation.

BOJ Governor Haruhiko Kuroda has indicated that the central bank could act in coming months if price gains soften. “We will continue our current monetary policy, but if there’s anything which could derail our course toward the 2 percent inflation target, we will not hesitate to change or adjust our policy,” Kuroda said at a conference of central bankers in Jackson Hole, Wyoming, last month.

BOJ officials meet tomorrow to discuss monetary policy.

Inflation Target

Japan’s inflation rate was unchanged in July after slowing the previous month. Consumer prices excluding fresh food rose 3.3 percent from a year earlier, the same pace as June, the statistics bureau said last week. Inflation was 1.3 percent when stripped of the effect of April’s increase to sales tax.

“Influencing the market is not the purpose of the reform,” Ito said today, when asked about the impact of changes to GPIF on Japan’s inflation target.

Ito welcomed the appointment of Yasuhisa Shiozaki as health minister, responsible for overseeing the reforms.

“I take this as a very good sign that Prime Minister Abe is serious in pushing the reform in GPIF,” said Ito. “Shiozaki has been very vocal on fast reform in governance and portfolio, and I have high hopes that he’ll implement necessary governance reform and portfolio reform.”

It was at Bretton Woods in 1944 that the U.S. dollar ascended to the role of the world’s reserve currency. In addition to fixed exchange rates, nations established the International Monetary Fund and started the process of rebuilding Europe’s economy in the aftermath of World War II.

That era ended in 1971, when inflation forced the U.S. to abandon the dollar’s peg to gold, marking a shift to floating exchange rates.