Japan Pension’s Portfolio Shift Makes Waves in Market


Japan’s Government Pension Investment Fund (GPIF) is in the midst of a portfolio shake-up that involves doubling its domestic and foreign stock holdings and cutting its domestic bond allocation by nearly 50 percent.

The GPIF isn’t nicknamed “the whale” for nothing – when the world’s largest pension fund moves, it makes waves that can be felt throughout the market.

That’s the case now, according to Bloomberg:

“We can only guess from piecing together the data, but it would seem natural that GPIF, called ‘the whale’ by the market, is moving toward its new portfolio targets,” said Takafumi Yamawaki, the chief rates strategist in Tokyo at JPMorgan Chase & Co. “As the Bank of Japan’s massive bond purchases have reduced liquidity, small catalysts can cause fluctuations in the yield. GPIF’s selling could expedite swings.”

GPIF, the world’s largest pension, pledged in October to reduce its holdings of Japanese debt by about half and double foreign assets and domestic equities, just as the BOJ expanded its unprecedented bond-buying stimulus. The pension’s shift may have exacerbated the decline of local bonds, the second-worst performing government security in the past month, while accelerating the weakening yen and boosting stocks at home, Yamawaki said.


The impact on overseas equities and the yen is smaller as GPIF’s purchases pale in comparison to global market values, said Jonathan Garner, chief strategist for Asia and emerging markets at Morgan Stanley in Hong Kong.

“The main importance is for the domestic equity market,” Garner said in a phone interview on Feb. 12. “It’s another reason to be quite bullish on Japanese stocks.”

Kazuhiko Ogata, an economist at Credit Agricole SA, said tight liquidity in the market is magnifying the effect of GPIF’s domestic bond reduction, causing sharp swings in yields.

The GPIF manages $1.1 trillion in assets.


Photo by Ville Miettinen via FLickr CC License

Questions Raised About Return Assumption of Japan Pension


Some experts, including a senior economist at the Japan Research Institute, have questioned whether Japan’s Government Pension Investment Fund (GPIF) is being too optimistic by assuming a 6 percent return per year on its domestic equity portfolio.

From the Asian Review:

The managers of Japan’s huge Government Pension Investment Fund must have their heads in the clouds to expect domestic shares to return an impressive 6% a year, some observers say.

The $1 trillion fund’s new medium-term investment plan, released at the end of October, assumes that economic growth and other macroeconomic conditions will resemble the Japan of 1983-93. But its expected nominal return on Japanese equities is based on corporate earnings from 1983 to 1989 — the high-flying years before the nation’s asset-price bubble burst.

Japanese bonds make up 35% of the GPIF’s new asset mix, down from 60% in the old portfolio model. Meanwhile, the fund’s target allocations for domestic and foreign stocks have each more than doubled, from 12% to 25%, while its allocation for foreign bonds has risen from 11% to 15%.

When it comes to international bonds and equities, the GPIF expects nominal returns of 3.7% and 6.4% at best. But its “upside scenario” for domestic stocks has them rising at 6% — a rate at which an investment, if compounded, would roughly double in 12 years. To arrive at this number, the fund crunched share prices, dividends, earnings per share and other stock-related data from 1983 to 1989.

Although Japanese shares returned far more than 6% during the bubble era, they did so amid an unprecedented economic boom. The odds of such an earnings-supported-rally occurring again are debatable. As to why the fund’s baseline for domestic equity returns ends at 1989, not 1993 as in the economic assumptions, GPIF President Takahiro Mitani said it was to control for the effects of the bubble bursting.

Japan’s GPIF is the largest pension fund in the world with $1.1 trillion in assets.


Photo by Ville Miettinen via Flickr CC License