Mitani sidelined by Abe as GPIF pension fund enters new era

by and

Bloomberg

When Takahiro Mitani’s term as head of the world’s largest retirement fund finishes in March, so too will the old era of Japanese pension management.

The former Bank of Japan official saw his power ebb during a five-year reign at the ¥131 trillion Government Pension Investment Fund, as Prime Minister Shinzo Abe took office with the goal of overcoming deflation.

Mitani, 65, will be the last person to wield sole control of a bond-heavy GPIF after the biggest overhaul in the fund’s history.

Abe, 60, has reshaped government by putting his own people in positions of power at institutions across the nation. Mitani, who watched Masaaki Shirakawa get replaced at the BOJ and proponents of “Abenomics” surround him at the fund, acquiesced to the new order after months of resistance. The GPIF he leaves has less reliance on domestic debt, a broader asset mix and plans to revamp governance.

“The wind has blown in a certain direction, and Mr. Mitani belongs to an era that has probably passed,” Jonathan Allum, a London-based strategist at SMBC Nikko Capital Markets Ltd., said Dec. 10. “His background is at the BOJ, from an earlier period of its history. It was time to change.”

Mitani became the public face of that shift at an Oct. 31 news conference. As cameras rolled and flashed in a rented conference room in Tokyo’s Roppongi area, he bowed, introduced himself, and spoke into seven microphones.

Finally, Japan is heading for “appropriate inflation,” he said, explaining why the fund would put half its assets into equities and slash local debt to 35 percent of holdings from 60 percent.

Mitani took over the GPIF in 2010 with no experience in the asset management industry, a staff of about 70 people and a pay packet worth ¥17.46 million for his first year.

With prices in Japan decreasing for more than a decade, holding 68 percent of assets in local debt fit with the pledge he made to gain the public’s trust through safe and efficient investment.

That changed soon after Abe came to power. In April 2013, Haruhiko Kuroda announced record stimulus just weeks after Abe put him in charge of the Bank of Japan. Stocks soared, the yen slumped and in May consumer prices stopped falling.

By November, the BOJ’s preferred measure of inflation was climbing at an annual pace of 1.2 percent. Mitani faced a public attack on his investment strategy, with a report commissioned by Abe painting a picture of a badly run fund that was out of step with the times.

The GPIF should consider cutting local bonds as the nation moves toward 2 percent inflation, and Mitani’s role as sole decision-maker should be replaced with a board structure, the panel led by Takatoshi Ito wrote.

“The portfolio revamp was a done deal from the start and forced through by the government,” said Akio Kato, general manager of the trading department at Kokusai Asset Management Co. “It was clear they took over the management of Japan’s pension savings.”

Nevertheless, said Kato, “Results are everything in investment. The GPIF did well over the past year and increased pension money. That’s part of Abenomics’ success for sure.”

The Topix index has almost doubled under Abe, buoying the GPIF’s assets to a record ¥130.9 trillion om Sept. 30. The fund returned an average of 2.9 percent a quarter since Abe came to power, compared with 0.8 percent in the two years before Abenomics. The measure is heading for a 9.6 percent gain this year.

Unlike Shirakawa at the BOJ, who resigned before his term was up, Mitani chose to defend himself, speaking out against the Ito report and the Abenomics behind it. In two interviews with Bloomberg News, in June and December 2013, he expressed doubt that the BOJ would get inflation up to 2 percent in two years.

He was among the first to say the GPIF shouldn’t be used to boost stock prices, a position that would become widespread among opponents of Abe’s plans for the fund. Ito’s report overstated the risk inflation posed to domestic bonds, he said.

None of that was evident on Oct. 31, when Mitani announced that Abenomics was working, inflation was accelerating and the time was right to make changes. By then, Abe had installed Yasuhisa Shiozaki, known for advocating changes at the fund, as welfare minister. Three members of the group that wrote the report saying the GPIF needed to change its ways were on the fund’s investment committee.

Shiozaki’s appointment “delivered the final blow,” said Kyoya Okazawa, Tokyo-based head of global equities and commodity derivatives at BNP Paribas SA, who suggested that Mitani stopped resisting around this time.

Seki Obata, a former member of the GPIF investment committee, commended Mitani for sticking around.

“He had the pride of a former BOJ man and wasn’t happy about many things,” Obata said in an interview Dec. 9. “He could have turned his back and rejected Abenomics, but he dealt with the changing environment and struck a delicate balance under tough circumstances.”

Nothing ruffled Mitani and he was the same with whoever he met, said Nobusuke Tamaki, who worked for him as a councilor at the GPIF.

“He was always a good listener and quick on the uptake,” Tamaki said. “He guided the organization through a lot of change, and made it easy for us to work there while that was happening.”

So far, the changes look like they’re working. The GPIF posted a 2.9 percent investment gain last quarter, earning at least 5.5 percent on local stocks, foreign equities and overseas bonds.

Mitani will be the last of his kind at the pension fund. The pension manager moved a step closer to introducing a board of directors last week, when a welfare ministry panel endorsed the proposal.

Private-equity executive Hiromichi Mizuno will join as chief investment officer in January, a new role and the most high-profile example of the GPIF’s push to hire people with experience managing money instead of career bureaucrats.

He will also head a new investment committee, the fund announced this week.

Asked if Abe’s regime was responsible for hiring Mizuno, Mitani said in an interview Dec. 3: “I’ll leave that to your imagination.”

The former BOJ man is not sure what he’ll do next. Golf, his only hobby, won’t fill the void, and he says he’s bad at it.

“I’m getting old,” Mitani said with a laugh. “There’s great pressure in managing ¥130 trillion. It’s certainly been interesting, but it’s a five-year term, and if I stuck around for another one I would be over 70 and might be past it. I want to enjoy my life a bit more in a quieter environment.”