Business

Pension investment fund must ditch JGBs: Ito

by Anna Kitanaka and Shigeki Nozawa

Bloomberg

The world’s biggest retirement fund needs to cut bond holdings now because the Japanese government will follow an advisory panel’s recommendation that the wealth manager seek higher returns, the panel’s head said.

The ¥124 trillion Government Pension Investment Fund should pare domestic bonds immediately to 52 percent of assets, its lower limit, in part by selling to the Bank of Japan, said Takatoshi Ito, chairman of the advisory group. Local debt comprised 58 percent of the fund’s assets as of Sept. 30.

“GPIF needs to start reducing bonds as soon as possible,” Ito said in an interview Friday. “Now is the right time to sell, while the BOJ is buying.”

The comments show a rift between Ito, an academic handpicked by Prime Minister Shinzo Abe to help overhaul government-backed pension plans, and Takahiro Mitani, president of GPIF since 2010.

The BOJ, which is buying more than ¥7 trillion in bonds a month, will fail in its goal of spurring 2 percent inflation and the risk of owning so much domestic debt was overstated by Ito’s panel, Mitani said this week.

“Mr. Ito clearly has the ear of the prime minister, which perhaps means that over a period of time, his views will prevail,” said Jonathan Allum, a strategist for SMBC Nikko Capital Markets Ltd., in a telephone interview from London. “But Mr. Mitani is the man that actually runs GPIF and it doesn’t look like he is very keen to change things anytime soon.”

GPIF needs to hold investments that can provide higher returns as retirement payouts rise amid the aging population, according to the report from Ito’s panel published Nov. 20. The fund should consider investing more in overseas assets, private equity, commodities, infrastructure and real estate investment trusts, the panel said.

The Health, Labor and Welfare Ministry will enact the panel’s advised changes, said Kotaro Mori, manager of investments for the government department that oversees public pension plans, including GPIF.

“The panel’s report has very valuable recommendations,” Mori said. “We will seriously consider and then implement these changes with GPIF, in light of the economy heading toward an exit from deflation.”

Mitani said in an interview Wednesday that inflation is less of a risk to GPIF than many people, including Ito, assume, because the fund is a long-term investor and can hold bonds until redemption. Consumer price increases will probably stay between 0.1 percent and 1 percent, missing the BOJ’s 2 percent target, he said.

Mitani “doesn’t seem to understand that it’s about mark-to-market valuation,” Ito said Friday.

The yield on the nation’s 10-year sovereign bonds touched 0.68 percent after Ito’s remarks, the highest since Oct. 1. Futures on notes due in a decade sank to 144.34, the lowest since Oct. 16.

“GPIF are being bullied into reducing their bond holdings while all other private funds, including insurance firms, have been raising their bond portion and lowering stocks,” said Amir Anvarzadeh, a manager of Japanese equity sales at BGC Partners Inc. in Singapore. “JGB holdings are one area they can have a very large impact, and yields are shooting up right now.”

If GPIF doesn’t start reducing its holdings before inflation takes root in Japan, the fund will exacerbate a slump in bond prices by needing to sell as demand from other investors wanes, Ito said.

“If inflation reaches 2 percent, and yields rise to 3 percent, and then they start trying to sell domestic bonds, we’ll see disaster in the markets,” he said.

With the budget and figures for pension payments due to be announced in March, GPIF should be able to design a new core portfolio by the middle of 2014, Ito said. His personal recommendation would be for as little as 35 percent of assets to be placed in local bonds, he said.

The changes proposed by the pension panel “will support and lift stock prices,” Ito said, adding that the panel’s main objective is to boost returns for the Japanese populace. “And by buying foreign assets, it will support a weakening yen. This isn’t a bad thing for the current state of Japan’s economy. It’s not going to create a bubble.”

GPIF should boost holdings of Japanese stocks to its upper limit of 18 percent, according to Ito.

The fund owned ¥71.9 trillion in domestic debt as of Sept. 30, according to its quarterly report. The nation’s consumer prices excluding fresh food, the BOJ’s gauge for its inflation target, increased 0.9 percent in October from a year earlier, government figures showed Nov. 29. A gauge of prices that also excludes energy rose 0.3 percent.

“There is a general ‘Abenomics’ push to change mindsets and particularly the mindset of the ‘power elites,’ ” SMBC Nikko’s Allum said. “It’s generally accepted that a lot of what drives inflation or deflation is expectations. It’s a battle you win in the mind, and on various fronts, including the BOJ and within the GPIF.”

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