Market expectations appear optimistic with regard to the Abe administration’s move to shift the portfolio of the Government Pension Investment Fund from domestic bonds to riskier but higher-yield investments such as stocks. Improving investment returns on the huge fund will be needed to stabilize the nation’s public pension system over the long term. However, the administration should not lose sight of the purpose of the GPIF portfolio review. It would be a mistake to see it as a short-term shot in the arm for the stock market.
The shakeup in the GPIF investment portfolio was featured in Prime Minister Shinzo Abe’s updated strategy for economic growth, formally announced on Tuesday. The world’s largest investment fund — worth roughly ¥129 trillion as of the end of 2013 — currently holds 55 percent of its assets in domestic bonds, with domestic stocks accounting for 17 percent. The plan calls for shifting the mix from the safe but low-yield sovereign bonds to riskier but higher-yield assets such as stocks and real estate investment trust.
Details of the new portfolio policy will be worked out by GPIF’s investment committee, comprising financial experts, as early as September.
The move is hailed as a boon for the stock market, which appears to have lost steam in recent months after surging in the first year of Abe’s economic policies. A mere one-percentage-point rise in the share of stocks in the GPIF portfolio will mean an influx of more than ¥1 trillion into the market. In April, Tokyo share prices spiked after Finance Minister Taro Aso hinted at upcoming changes in the fund’s portfolio.
Such expectations should not blind us to the purpose of the GPIF portfolio review. GPIF manages reserve funds for the public pension schemes to be used for payouts to retirees. Better investment performance of the fund contributes to the future stability of the public pension system, which is increasingly challenged by the rapid expansion of the nation’s aging population. Fewer people of working age are supporting welfare programs for the growing ranks of the elderly.
Diversifying the fund’s portfolio will help reduce the risks in its asset management. Japanese government bonds are safe assets but carry low returns. Excessive bond holdings can be a risk when the economy is growing fast and prices and wages are rising. A rise in long-term interest rates could push down the prices of existing bonds. Meanwhile, stock investments can bring higher returns if managed properly although they carries the risk of losses when the market goes down.
Since the fund deals with money to be used for pension payouts, losses from investment failures could result in reduced pension benefits or higher premiums for future generations. Increasing the share of riskier assets in the GPIF portfolio needs to be carefully weighed against the priority put on long-term stability in investment performance. Improving governance of the pension fund and reform of its organization, including beefed-up fund management system and manpower with high-level expertise, will also be essential.
Abe, whose popular support has relied a lot on the performance of the economy, is said to have ordered the Health, Labor and Welfare Ministry to front-load the review of the GPIF portfolio, raising speculation that he was trying to give the stock market a much-needed boost through the injection of GPIF money.
Using money from the public pension fund as a political tool or a stock market operation could distort its operation. The review of the GPIF portfolio should focus strictly on the stability of the public pension system.