Japan Pension Whale Leaves Blank Space as Bond Retreat Nears End

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The world’s biggest pension fund may be near the end of a strategic shift from bonds into stocks. Japanese markets are noticing the gap left by “the whale.”

Net purchases of Japanese government bonds by trust banks, which reflect activities of retirement plans such as Government Pension Investment Fund, were 219 billion yen ($1.8 billion) in May, according to Japan Securities Dealers Association. That was the first buying after seven months in which 4.9 trillion yen was sold. They’ve been net sellers of local stocks for three months, exchange data show.

Japan’s Topix index rallied 26 percent since GPIF revealed an unprecedented shift into equities from bonds in October and the 10-year sovereign note yield climbed even as the central bank made historical purchases. Reduced activity by the fund, known as the ‘whale’ for its sheer size, may cut demand for shares and make it harder for the Bank of Japan to find sovereign debt to purchase.

The GPIF “should be really close to its asset target now,” said Yunosuke Ikeda, the head of currency strategy in Tokyo at Nomura Securities Co. “We may see a little bit of a blank space in the market.”

The fund said on Oct. 31 it would reduce domestic bond holdings to 35 percent from 60 percent and double Japanese and foreign equities to half of assets amid concern inflation will erode the value of its Japanese debt. Its foreign bond target was also lifted to 15 percent from 11 percent. On the same day, the BOJ expanded its unprecedented bond-buying stimulus, saying it will purchase as much as 12 trillion yen of Japanese government debentures each month.

Pension Clones

Japanese bonds made up 43 percent of GPIF’s assets at the end of December, down from 48 percent three months earlier, while local and overseas equities each rose to 20 percent.

Other public pension funds followed in GPIF’s steps, with retirement pools for public servants, local government officials and private school teachers announcing in March similar plans to alter their investment targets. At the time, the three collectively held about 30.3 trillion yen of assets.

The GPIF probably held 40.8 percent in local debt, 23.2 percent in domestic stocks, 13.3 percent in overseas bonds and 22.7 percent in foreign equities as of June 19, according to calculations based on market moves and trust bank data by Yohei Iwao, an executive director and quantitative strategist at Morgan Stanley in Tokyo.

‘Domestic Support’

The GPIF “had given foreign investors reassurance of domestic support” in the Japanese stock market, Iwao said. “There’s likely to be continued support from other public pensions. Once their reallocation finishes, there is less domestic support so there will be growing concerns from the foreign investors.”

Trust banks purchased 1.6 trillion yen of Japanese stocks following GPIF’s announcement in October through the end of February, Tokyo Stock Exchange data show. Since then, they’ve sold a net 507 billion yen in shares. For overseas assets, purchases by the banks dropped to 191 billion yen in May, the lowest in 10 months, according to the Ministry of Finance.

‘Taking Time’

Even as the data points to a shift that’s coming to an end, a top government adviser on the pension fund’s reforms said the asset movement will still take a year or two. Takatoshi Ito, who led a government panel in 2013 that recommended the switch into riskier assets, said earlier this month he expects the fund to complete the change by 2017.

“It’s taking time but going smoothly,” Ito, who took up a position at Columbia University this year, said in an interview in Tokyo.

The benchmark 10-year government bond yield was 0.465 percent on Wednesday up from 0.33 percent at the end of 2014. The yen has weakened about 10 percent since the end of October and traded at 123.87 per dollar.

“It’s one less negative for the JGB market,” said Katsutoshi Inadome, a fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities Co. “It’ll make the BOJ’s purchase program more effective, and as a result the yield curve on long-term rates should flatten.”