Business / Financial Markets

GPIF's smaller clones seen as savior to BOJ as it runs out of bonds to buy

by Anna Kitanaka and Shigeki Nozawa

Bloomberg

The Bank of Japan’s search for fresh bonds to fuel its unprecedented asset-purchase program is set to get easier as public retirement funds with $276 billion turn into sellers of government debt.

Three pension pools for Japan’s private school teachers and public servants — known as mutual aid retirement managers — have probably started cutting their domestic debt holdings while buying local equities, according to Credit Agricole SA and Bank of America Corp.

Trust banks, which manage public retirement money, sold a net ¥215 billion ($1.8 billion) of Japanese government bonds in August while purchasing ¥270 billion of shares, the most in six months.

An increased supply of JGBs in the secondary market will provide more buying options for the BOJ, which would have to purchase every single newly issued bond by the Finance Ministry to reach its monetary easing goal. It will also help bolster Japan’s equity market and curb gains in the yen, according to Credit Agricole. The mutual aid managers on Thursday will adopt the $1.2 trillion Government Pension Investment Fund’s portfolio target of reducing local bonds in favor of riskier assets.

“GPIF has almost finished its asset shift, but the other pension funds are still making changes, which is going to help the BOJ,” said Kazuhiko Ogata, the chief Japan economist at Credit Agricole in Tokyo. “This will act as a support for Japanese stocks and will help restrain the yen from rising.”

GPIF announced unprecedented changes to its portfolio on Oct. 31 amid concern inflation will erode the value of its domestic debt investments. The same day, the central bank expanded its monetary easing operation to target as much as ¥12 trillion in domestic bond purchases a month, prompting some investors to speculate the BOJ will struggle to find enough JGBs to buy.

GPIF’s investment results for the quarter ended June showed it has largely completed its move to cut domestic bonds by almost half to 35 percent and more than double local and foreign equity holdings to 25 percent each. It was just 2 percentage points away from its 15 percent overseas debt goal.

“GPIF has basically completed its shift, and without the other funds selling JGBs, the BOJ’s operation starts to look insecure,” said Shuichi Ohsaki, a rates strategist at BofA’s Merrill Lynch unit in Tokyo. “Unless they move, it’s going to cause a problem.”

The portfolio for the Federation of National Public Service Personnel Mutual Aid Associations, which manages about ¥7.8 trillion, was the furthest away from the new targets among the three pension funds. It held about 70 percent in domestic bonds, 13 percent in Japanese stocks and approximately 15 percent in foreign debt and equities as of March 31.

The Promotion and Mutual Aid Corporation for Private Schools of Japan and the Pension Fund Association for Local Government Officials, which manage about ¥25.3 trillion combined, held just over half their assets in JGBs at the end of March.

The three funds would have to offload ¥6.7 trillion in domestic bonds, buy ¥2.1 trillion of Japanese stocks and add ¥5.3 trillion of foreign assets to reach their new targets, based on March 31 figures.

Stock investors are watching pension fund flows after a global equity rout sparked by China’s devaluation of the yuan erased $267 billion from Japanese shares last month. The Topix index dropped 7.4 percent in August, while Japan’s sovereign debt yielded 0.2 percent as measured by Bank of America Merrill Lynch index. The yen gained 2.2 percent versus the dollar.

“It’s important for stocks,” Tim Schroeders, a fund manager who helps oversee about $1 billion in equities at Pengana Capital Ltd. in Melbourne, said by phone. “Hedge funds are looking for a reason to trade and factors in the short-term that they can exploit, and understanding that dynamic with regards to fund flows is an exploitable opportunity.”