The government is readying to unfetter its huge public pension fund, freeing managers to dump low-yield sovereign bonds and go in search of higher, but riskier returns, in a move that could see cash flood global markets.
The nation’s pension program, into which almost all citizens pay, is supported by the world’s largest investment fund, worth a staggering $1.26 trillion — equivalent to one-quarter of the country’s entire economy.
It towers over its nearest competitor — the $700 billion belonging to Norway — and is multiples of the $173 billion holdings of Temasek, Singapore’s sovereign wealth fund.
But, unlike some other more adventurous vehicles, the Government Pension Investment Fund keeps by far the majority of its cash in supersafe — and superlow returning — Japanese government bonds.
Now all of that could be about to change, as Prime Minister Shinzo Abe tries to shuffle into place the next piece of his “Abenomics” jigsaw puzzle.
The bid to shake up the slumbering economy after two decades of drift began in early 2013 with a public spending bonanza and unprecedentedly aggressive monetary easing from the Bank of Japan.
But, 18 months down the line, the initial sugar rush is fading, and Abe must now put in place some of the promised structural reforms he — and most economists — say are necessary.
Not least of which is getting more bang for the buck on the public pension fund to help a shrinking number of workers pay for a growing number of retirees.
About half of the social security budget goes to pensions, a figure equal to around 12 percent of the entire economy. Bolstering the performance of the reserve fund would take pressure off the public purse.
Earlier this month, Abe reportedly instructed his welfare minister to review the fund’s operating portfolio, urging it to make more aggressive investments in foreign and domestic stock markets.
The knock-on effect, say analysts, could be huge.
“Moving just 1 percent of the fund into stock markets — there goes more than ¥1 trillion ($9.8 billion) right there,” said Tsuyoshi Ueno, a senior economist at NLI Research Institute.
If, as some observers expect, GPIF increases the share of assets in domestic stocks by 5 percentage points, that would inundate the Tokyo bourses with about ¥6 trillion — half the total value of all foreign investment in the markets, Ueno said.
The fund currently holds 60 percent of its assets in domestic bonds, with 12 percent each in foreign and domestic stocks and 11 percent in foreign bonds, according to its website. Holdings also include cash and other assets.
Yasuhiro Yonezawa, head of the fund’s investment committee, told The Wall Street Journal last week that domestic bonds could, in the future, account for just 40 percent, with the difference made up by foreign bonds and by stocks, both at home and abroad.
Cynics suggest that a prime minister in search of a feel-good factor could do a lot worse than chuck bundles of cash at the stock market because the extra demand will ratchet up prices.
And the trickle down of all that money floating around would be a shot in the arm for the inflation that Japan so badly needs — a cause to whose mast Abe has firmly nailed his colors.
A further boon: selling off government bonds — probably to the hungry Bank of Japan — and spending the proceeds in foreign markets would push the yen down, helping exporters and nudging up import costs, and therefore inflation.
It is perhaps these very foreseeable accusations that may give managers pause; the Japanese public is generally conservative and will be particularly sensitive to the idea of anyone playing fast and loose with their pensions.
“It is not clear who would take the responsibility for the possible risk incurred by more aggressive operation,” said Ueno of NLI, adding the mooted 20 percent rebalancing was far from certain.
Still, he said, traders appeared to be buying into the idea that there will be at least some breaking of the levy to let GPIF’s cash flow into the stock market, sending prices northward.
“Market players have already started digesting the great impact expected from GPIF investment reform,” he said.
In fact, “they are more sensitive about news on GPIF than any news of Abe’s growth strategy itself.”