Bloomberg News reported on February 06, 2014 that one of Japan’s largest government pension funds, known as the Government Pension Investment Fund (GPIF) has been advised by one of its board members, Mr. Makoto Utsumi, who is currently serving as the President of debt rating firm Japan Credit Rating Agency Ltd. to look into the possibility of diversifying its existing Japanese Government Bond (JGB) fund holdings to include other higher-yielding, higher quality financial investments, as yields on most JGBs are historical lows, which meant that lower derived returns, and huge opportunity costs incurred.
Readers might have recalled a similar blog article discussion written late last year on some of the key challenges facing GPIF as its fund holding returns were underperforming relative to the local financial markets, and how to ensure that pension obligations are being fulfilled due to the resulting low JGB yields as a result of the massive bond buying programme unveiled by the Bank of Japan (BOJ) under the helm of Governor Haruhiko Kuroda early last year as part of the monetary policy reforms introduced that were included as part of Prime Minister’s so-called ‘Three Arrows’ policies (Fiscal, Monetary and Structural). The bond buying programme has been set at Japanese Yen 7.0 trillion per month, and its reiteration of its January 22, 2014 continuing stance of maintaining relative low interest rates in a bid to revive the Japanese economy.
However, Mr. Utsumi was quoted by Bloomberg News by saying that, “Holding bonds until maturity while the BOJ continues to intervene, means GPIF ends up with a huge amount of low-yielding assets.” Another board member, Mr. Takatoshi Ito was also quoted by Bloomberg News as saying that as a fellow board member in GPIF, he has advised the Japanese government to look into the possibility of diversifying its existing JGB holdings as Japan’s inflation figures are starting to inch higher towards to the BOJ’s inflation target of 2.0 percent. The higher yields offered by non-JGB instruments could act as a hedge in offsetting some of the risks associated with a time eroding instrument such as a government bond investment, and/or other credit-like instruments.
In addition to these latest remarks, with Japan being assigned with a double ‘A’ credit rating status by most credit rating agencies, and its relatively two times debt to Gross Domestic Product (GDP) ratios, there is an urgent need to think seriously about moving away from the large exposure to bonds, and other credit-like instruments which offers yield spreads that are generally lower against other instruments such as equities, real estate, among others. Moreover, holding such a large chunk of JGBs could turn out to be a risky portfolio strategy when inflation starts to creep up, and the economy might not be able to cope with the sudden spikes of volatility coming from active selling of those bonds, resulting in lost returns, and shortfall of pension payments to its beneficiaries.
The latest Bloomberg News article does warrant the Japanese government to start to think seriously on debt financing, and its government pension obligations to the retirees and beneficiaries. There has to a change in the mindsets of many Japanese lawmakers that such low yields being earned through investments in JGBs should not be a permanent feature in the way on how it raises the necessary funds needed to finance the pension trust fund, and fulfilling its pension obligations to its beneficiaries in the process.