Is this the time to rethink about the percentage of allocation to domestic bond holdings by Japan’s pension fund?

Bloomberg News Online reported on November 21, 2013 that Japan’s Government Pension Investment Fund (GPIF) was being urged by pension experts to relook at its approximately Japanese Yen (JPY) 121.0 trillion (USD 1.21 trillion) worth of pension assets, which are mostly allocated to domestic bond holdings, namely the Japanese Government Bonds (JGBs). The pension experts have also called for the liberalisation of the decision-making control, and allowing more private fund managers to take part in managing the portfolio. The current legislation allows only the Japanese government to make decisions regarding the control and management of the pension fund assets. According to market data extracted from, the spot 10-year JGB yields are currently trading unchanged at approximately 60.0 to 61.0 basis points (bps) as of 0950 hours (SG/HK time).

The latest release of the report by the advisory group tasked by the Japanese government to examine the GPIF fund holdings has concluded that the fund should consider carving out the pension asset fund into so-called ‘Baby Funds’ which will invest in private equity, overseas assets,, commodities, and real-estate investment trusts (REITs), where expected returns earned could be higher than the current allocation of JGB holdings. They have also urged the GPIF to allow greater participation of private fund managers in running the funds in order to ensure greater accountability, and encourage more open transparency in the management of the pension fund assets.

According to Bloomberg News, the GPIF is under pressure to cover payouts as there has been a disproportionate ratio of seniors relative to the young, and birth replacements measured by the total fertility rate (TFR) stands at approximately 1.2 to 1.3 times, which is one of the lowest among the developed economies. The low fertility rate has always hampered much of Japan’s economic growth, and this is not something new. Mr. Takatoshi Ito, the panel’s chairman was quoted by the press as saying that the fund’s allocation towards domestic bonds was too high, and it calculated investments based on an average inflation of 2.0 percent, which was considered too high given the historical low interest rate environment Japan has been facing for past few decades. Incidentally, Bloomberg News reported during early Asian trading hours on November 21, 2013, that several analysts familiar with the workings at the Bank of Japan (BOJ) might consider relooking at its 2.0 inflation target, following the stubbornly low actual inflation levels most of us of seeing now. The BOJ is scheduled to announce its rate decision at approximately 1145 hours (SG/HK time), followed a press conference by Governor Haruhiko Kuroda at 1315 hours (SG/HK time) explaining the rate decisions. Several economists have forecasted no change in BOJ’s zero interest rate policy (ZIRP), but might announce its intention to revise its inflation target of 2.0 percent downwards to reflect current market conditions. However, it is unlikely that BOJ might consider an immediate revision to the 2.0 percent inflation target today, given the potential impact of such as news on the financial markets, instead choosing to undertake comprehensive reviews throughout the rest of this year and next on the inflation level target.

The Japanese Yen (JPY) currency has weakened since the release of the report on November 20, 2013, is currently hovering at approximately the spot 100.0 levels to the US Dollar, and is likely to weaken further throughout the rest of the trading session as the BOJ is set to announce its interest rate decision on November 21, 2013. There are a couple naysayers within GPIF regarding BOJ’s current monetary tools, among which a pension fund official, who is also GPIF’s president, Mr. Takahiro Mitani, was quoted by Bloomberg News as saying that he is highly doubtful that the BOJ could achieve the inflation target of 2.0 percent any time soon. The low levels of inflation has mixed impacts so far on the Japanese economy, as inflation levels since Prime Minster took office in January 2013 have so far recorded its first positive read in October 2013, where there were some positive inflationary trends being shown, but that has not made a significant impact to the annualised Gross Domestic Product (GDP) growth, or consumer spending levels yet. In addition, with the expectations that inflation will stay low for the next couple of months, Japanese consumers are mostly concerned about the impact to their household budget spending limits as a result of the comprehensive rise of the consumption tax to 8.0 percent from the current 5.0 percent in April 2014.

The advisory panel’s findings and recommendations do serve somewhat of a wakeup call for GPIF not to be highly exposed to a certain asset class, so as to minimise the impact of rising long-term yields that might have on the long-term returns of the fund portfolio. The report is centred mostly on GPIF’s investment decisions and whether there is a need for GPIF fund managers to diversify its asset holdings more broadly into other assets classes, and allow more private fund managers to take part in the management of the fund’s assets. However, with the relative low rate of inflation levels seen in Japan, it is time for the GPIF to re-examine its fund holdings, and possibly rebalance the portfolio to increase its exposure to other asset classes, apart from JGBs. Although JGBs might sound ‘safe’ in terms of the sovereign backing from the Japanese government, it does pay to recall that Japan’s credit rating has earlier been downgraded by major credit agencies in 2011 due to its public debt levels hovering at approximately over 200.0 percent as compared to its overall GDP levels. This also represents a form of systemic risk that comes with owning a relatively high proportion of JGBs where any negative re-rating of Japan’s sovereign credit, could result in severe consequences if a portfolio holds too much bond holdings relative to other forms of asset classes.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc