The shift of Japanese pension plan assets from fixed income to equity – Will this be a game changer for the Japanese economy?

In a Bloomberg.com news article published on June 07, 2013, it was reported that the Government Pension Investment Fund (GPIF) is reducing its holdings of Japanese bonds from 67.0 percent to 60.0 percent, and the weighting of domestic shares will be increased from 11.0 percent to 12.0 percent. As the article was being written on the morning of June 10, 2013 (Singapore/Hong Kong time), the Nikkei 225 futures trading in Chicago was up by approximately 500.0 points (pts).

According to the Bloomberg.com article, GPIF’s recent shift to higher-yielding assets is seen as a move towards the funding of retirement assets of the Japanese seniors as yields are being lowered as part of Prime Minister, Shinzo Abe’s plans for the massive fiscal and monetary stimulus the is ongoing. The move came after the massive selloff of many of Asia’s stock bourses on June 06 following the disappointment coming from the lack of clarity of the details outlined by Prime Minister Abe’s ‘Third Arrow’ economic stimulus plan.

The shift of pension plan assets does not have a specific time frame attached to it, but the objective is likely to increase the domestic retail participation in stocks listed on the Japanese bourses. In addition, the Bloomberg article went on to mention that allocations to foreign bonds will rise from 8.0 percent to 11.0 percent, while overseas shares will increase from 9.0 percent to 12.0 percent. GPIF was created in 2006, and is currently managing approximately 112.0 trillion Yen (USD 1.16 trillion) as of December 31, 2012. The asset allocation mix has remained stable during the Global Financial Crisis (GFC) of 2008 – 2009, and the March 2011 twin disasters (earthquake and nuclear meltdown), which took a massive toll on the Japanese economy.

There will be questions remaining over the recent moves made by GPIF, and whether it is seen as positive in the long-run, given the run-up in the Japanese Government Bond (JGB) yields seen recently, along with stock prices heading downwards. The shift in pension assets might be beneficial to the stock-markets over the short-run, but it still leaves question marks over some of the fundamental questions expressed in my previous article discussing the topic of Prime Minster Abe’s ‘Third Arrow’ economic plan, namely the demographics issue, low female labour force participation rates, lack of population growth, lack of innovation and technology coming from the small and medium-sized enterprise (SME) sectors, etc. So far, based on the various news analyses on the Japanese economy, the structural issues have not been properly addressed as top priorities in most of these debates over Prime Minister Abe’s economic plans.

Along with the recent rise in JGB yield rates, there are also issues relating to the ongoing unwinding of the infamous Yen carry trades. According to a recent Bloomberg Television interview with Bill Gross, one of PIMCO’s top bond portfolio managers, who is also currently managing to billion dollar Total Return Fund, where he mentioned the unintended consequences of Bank of Japan (BOJ) monetary stimulus that is modelled closely with the US Federal Reserve’s ongoing Quantitative Easing (QE3) programme. The plan by BOJ to lower interest rates and stoking up demand have not been fully felt across the economy, except that as of Q1 2013, gross domestic product (GDP) growth did rise to 4.0 percent (revised from 3.5 percent as of June 10, 2013). Over the long-run, there are still question marks as to whether the double dose of stimulus, both fiscal and monetary, will really provide the jolt needed for the Japanese economy. Could Japan risk chalking up massive debt levels which might negatively impact its credit ratings, and whether the pace of inflation growth will exceed the targeted minimum of 2.0 to 3.0 percent? The decades-long deflationary issues have not been truly resolved despite previous administrations’ attempts to boost consumption and investment. Also, will Prime Minister Abe remain in office for a long period of time, given that there have been frequent changes seen in the Japanese Cabinet since former Liberal Democratic Party (LDP) Prime Minister Junichiro Koizumi left office after spending a five-year term during 2001 to 2006. The frequent changes of the leadership in Japan do not provide much comfort to investors and the Japanese people in terms of continuity of policies implemented by the Japanese government.

Overall, the recent moves by GPIF could be seen as positive to the Japanese equity markets, but I believe that there will still be some degree of scepticism being expressed by many investors who are seeking for stability and assurance from the continuity of the leadership. Given that GPIF did not provide any time frame on the completion asset allocation plans, there are questions over whether the fund managers are looking for to time the market in view of the instabilities which are currently showing up in most of the global financial markets recently. These questions are similar to the questions expressed by sceptics over the recent Prime Minster Abe’s ‘Third Arrow’ economic plan. Therefore, it remains to be seen whether the Japanese economy will undergo significant changes, along with the lack of concrete actions undertaken by policy makers, who are still watching from the side lines in view of the current disruptions seen recently in the global financial markets.

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

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