Japan’s Pension War

By | Updated March 3, 2017 8:18 AM UTC

It’s a mountain of money the size of Mexico’s economy. It could buy Apple and Exxon Mobil and still have change. Japan’s Government Pension Investment Fund is the world’s biggest state investor — trumping all managed government retirement and sovereign wealth funds — and the way it spends its staggering $1.3 trillion can roil global markets.  Japan’s leaders wanted the bureaucrats who managed its sleepy strategy to plow more money into risky investments, aiming to stimulate the economy and finance pensions in the world’s most rapidly aging society. Opponents accused them of favoring the stock market and their own approval ratings over pension security. Regardless, the fund now owns more than 5 percent of the domestic stock market and has become the top shareholder of companies from Honda to Mitsubishi UFJ Financial Group. 

The Situation

The government has pushed GPIF to broaden assets, hire proper investment professionals and use its might to impel companies to increase profits. It’s one front in Prime Minister Shinzo Abe’s drive known as Abenomics to spur inflation and jolt Japan out of its two-decade-long economic slump. The fund doubled its holdings in stocks and cut its allocation of bonds as part of a strategy revamp that started in October 2014, on the assumption that rising prices would erode the spending power of the measly payments from the country’s debt. Before the shift in strategy, half the fund was invested in Japanese bonds, mainly government debt paying one of the lowest sovereign yields on the planet. Considering Japan’s demographic predicament — a shrinking population and a record number of people over 65 — advocates of the change argued that something had to be done. While inflation remains elusive, the fund posted the best quarterly investment gain in its history at the end of 2016, as stocks rallied after the election of Donald Trump as U.S. president. This came as a welcome relief as earlier losses had wiped out all returns since the fund changed its investment strategy. The volatility is unlikely to divert the fund from its current path, especially as Japanese debt yields languish at low levels. The fund became the No. 2 stakeholder in Toyota Motor and the biggest investor in at least 121 Tokyo-listed companies while also lifting the proportion of equities that it actively manages. Diversification will continue with investment targets including emerging-market debt and junk bonds.

The Background

GPIF invests for the two main state retirement systems, covering most pension savers in Japan. The fund pays more to retirees than it receives in contributions, and its returns have lagged peers with more aggressive strategies. It earned an average of 2.8 percent in the nine years through March 2013. That compared with 5.2 percent for Norway’s Government Pension Fund Global and 7.3 percent for the California Public Employees’ Retirement System, or Calpers, the biggest managed U.S. fund. Norway is also trying to boost returns on its $860 billion hoard, which is fed by the country’s oil riches and is the biggest sovereign wealth fund. The $2.8 trillion U.S. Social Security Trust Fund has twice the assets of GPIF, though it isn’t actively managed and invests only in U.S. Treasuries. In 2005, President George W. Bush proposed a partial privatization of the fund to keep it solvent and was quickly shot down. Had it gone through, U.S. retirees would have had much more at stake when the 2008 financial crisis sent stocks tumbling.

The Argument

GPIF’s managers have argued that the fund’s sole responsibility is to Japan’s past and present workers and that it must not stray from its central mission. Returns have beaten growth in wages, which haven’t risen more than 1 percent annually since 1997. Takahiro Mitani, GPIF’s then president, insisted before the strategy change that inflation isn’t the threat some think it is. The fund shouldn’t be hijacked by politicians to reignite a stalled rally in the nation’s stocks, he said. Lawmakers’ plans for GPIF are part of a broader drive to reshape Japan. With the return on equity of Japanese companies stuck below the global average, the government created a stewardship code to encourage the country’s hitherto silent institutions to press companies they own to improve. Tokyo’s stock exchange established a corporate governance code and introduced an index of companies that reward shareholders well, partly to guide GPIF on what to buy. The fund’s managers have been taking small steps on the road to reform, like removing a cap on salaries for investment experts and hiring an activist fund to help with stock management. In April, Norihiro Takahashi replaced Mitani as president, the first person to fill that post with previous experience in asset management.

The Reference Shelf

  • Bloomberg ranking of the world’s biggest managed pension funds.
  • QuickTakes on Abenomics, Japan’s corporate governance and Japan Post.
  • The report of a panel reviewing Japan’s public pensions and GPIF’s 2014 statement on revamping investments.
  • GPIF’s website provides reports on its operations.

First published June 3, 2014

To contact the writer of this QuickTake:
Tom Redmond in Tokyo at tredmond3@bloomberg.net

To contact the editor responsible for this QuickTake:
Grant Clark at gclark@bloomberg.net