Japan’s public pension funds urged to diversify portfolio

In line with Prime Minister Shinzo Abe’s continuing efforts to end 20 years of deflation, Japan’s massive public pensions funds are being advised to change their investment strategies; ditching the low-risk bonds in favour of stocks and other risky assets.

The independent panel of experts who disclosed the measures finished their report last Wednesday, and have called for more aggressive administration of Japan’s USD 1.6 trillion in public pension money.

Changes include reducing the bond holdings of the pension funds to move towards more risk-taking in assets such as stocks, which has already stirred interest from investment professionals looking to profit from the opportunity.

The hope is that the diversification from domestic debt will better support Japan’s economy, in turn lifting pension returns.

Historical context

The funds’ bond-heavy portfolios have supported Japan’s USD 8.4 trillion government bond market for years.

Bonds have consequently held low interest rates despite holding some of the largest budget deficits in the world.

But with the Bank of Japan now purchasing Japanese Government Bonds, yields are keeping stable – leading to a climbing inflation.

This led the panel, chaired by University of Tokyo professor Takatoshi Ito, to suggest the time is ripe to pump more public fund money into higher-yielding assets.

Private equity

The experts have also called for the USD 1.2 trillion Government Pension Investment Fund (GPIF), the second-largest pool of retirement funds in the world, to consider putting money into private-equity and infrastructure funds investments.

In addition, they have proposed GPIF should be managed by a board of directors, rather than one president and one director.

Given the size of Japan’s huge pension funds, anticipation of the recommendations has stirred investor sentiment in Japan in recent weeks.

Stock index

On Wednesday, Japan Exchange Group Inc. said it will launch a new 400-issue Tokyo stock index, developed in partnership with business news company Nikkei Inc., on the first trading day of next year.

The move is part of effort to revitalise stock markets and garner international investors.

Traders and fund managers are therefore particularly focused on Ito’s panel’s recommendation that the GPIF adopt the stock index of 400 issues as one of its benchmarks.

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