Japan’s Public Pension Fund Has Room For More Investments

By Mani
Updated on

Japan’s public pension fund, Government Pension Investment Fund (GPIF), is reportedly considering the idea of shifting more of its investments into domestic stocks, according to Reuters.

Japan’s Public Pension Fund Has Room For More Investments

GPIF Would Be Forced To Invest In Bonds

Chikafumi Hodo of Reuters feels without such a shift to domestic equities, GPIF would be forced to park more of its investments in Japanese government bonds. The 10-year Japanese government bond yields tapered off, after posting about 1 percent rise, signaling the end of a rally in the government debt market.

Prime Minister of Japan Shinzo Abe’s new initiatives, popularly called Abenomics, focus on economic growth with 2 percent inflation coupled with more encouragement for investment from corporates and spending by consumers.

Enthused by these new measures, Japanese investors have shown increasing risk appetite and pushed the equity market in Japan to post over 60 percent return since November.

GPIF’s model portfolio is skewed towards debt with 67 percent allocated to bonds, 11 percent earmarked for domestic stocks, while foreign bonds and foreign stocks get an allocation of 9 percent and 8 percent respectively from the kitty. By the end of December, the pension fund invested about 60 percent in domestic bonds, a tad closer to its 59 percent minimum limit, while its exposure to foreign equities stood at 13 percent, close to its allocation ceiling of 14 percent.

However, by the end of December, GPIF’s invested only about 13 percent in domestic equities as against its ceiling of 17 percent, thus giving adequate room for fresh investments.

With sufficient headroom provided for additional investments in the domestic equities coupled with the recent stock market rally, the world’s largest pension fund is expected to announce its first revision to investment strategy since 2006.

The $1.1 trillion pension fund was subjected to scrutiny by Japan’s Board of Audit in October 2012. The public agency wondered whether GPIF’s portfolio targets should be changed to better reflect considerations of investment risk.

The largest pension fund in the world, GPIF’s investment model stood the test of time during the past six years through March 2012, where its investment in yen bonds provided a 2.28 percent return as compared to a negative 9.43 percent posted by the domestic stocks.

GPIF’s huge portfolio of $1.1 trillion compares well with the size of the annual economic output of countries like Mexico.  The pension fund’s long-term investment targets are required to be reviewed and approved every five years by Japan’s health minister. However during extraordinary market events, the pension fund is permitted to modify its investment targets. Interestingly despite the 2008 Lehman crisis and the 2011 earthquake and tsunami in Japan, the fund kept its investment targets unchanged.

In the recent past, Japanese pension funds showed appetite to move funds to global alternative asset classes.

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