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Japan’s Pension War

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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 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.