Business / Financial Markets

Record $135 billion loss by Japan's pension fund shows shifting from bonds to stocks has a cost

Bloomberg

A record quarterly loss at the world’s largest pension fund is prompting a debate on whether its shift to stocks from bonds was excessive.

Domestic debt held by Japan’s Government Pension Investment Fund returned 1 percent in the three months ended Dec. 31, while the nation’s stocks erased 18 percent of their value, a GPIF statement showed on Feb. 1. The fund lost a record ¥14.8 trillion ($135 billion), or 9.1 percent.

While stocks helped the fund boost returns in the previous two fiscal years, the loss may provide ammunition for critics of Prime Minister Shinzo Abe, who backed a review of GPIF’s strategy that led it to put about half of its assets in equities and cut domestic bonds in 2014.

Akira Koike, head of the secretariat of the Japanese Communist Party, said via Twitter on Feb. 1 that nobody is taking responsibility for the loss. Pension funds were used to boost stocks and showcase Abenomics, he said.

“There’s a possibility that GPIF’s strategy has leaned toward taking too much risk,” said Hiroaki Muto, the chief economist at Tokai Tokyo Research Center. “Opposition parties may use the loss as a good tool to criticize Abenomics.”

Deputy Chief Cabinet Secretary Yasutoshi Nishimura said in a news conference on Feb. 1 that the GPIF’s investments should be carried out with a long-term perspective and not focus on short-term fluctuations, adding that the loss won’t impact pension payouts.

The Topix index plunged 18 percent in the October-December period, the biggest quarterly decline since 2008, while the S&P 500 Index dropped 14 percent, the most since 2011. Japan’s currency strengthened 3.7 percent against the dollar in the quarter.

Losses would have been limited if the GPIF had invested in more domestic bonds, as the Bank of Japan is keeping bond yields low, according to Tokai Tokyo’s Muto. Yet it may be difficult for the GPIF to reduce its general allocation in stocks because such a move would have a negative impact on the equity market, he said.

GPIF has a general target to keep 25 percent of its basic portfolio in domestic stocks and 25 percent in overseas shares. The permissible range of deviation is 9 percent for local equities and 8 percent for stocks abroad.