Government Advisor Urges GPIF to sell $245 billion of Japanese Bonds

The man leading the charge on overhauling Japan’s Government Pension Investment Fund has said the fund should pare back total bond holdings to about 35% of assets.

(April 17, 2014) — Japan’s government pension fund should sell ¥25 trillion ($245 billion) of local bonds, according to the man tasked with transforming its portfolio construction.

Takatoshi Ito, head of a panel that advised the government on updating the Government Pension Investment Fund’s (GPIF) investment strategy, has recommended reducing the fund’s holdings of domestic bonds from 55% to 35%.

“Inflation is entering a new stage and large-scale changes are needed for GPIF’s portfolio,” Ito told Bloomberg. “GPIF should immediately shift from domestic bonds into other assets.”

GPIF has been under considerable pressure to boost returns for the past few months, as pension payments for the world’s oldest population grow.

The fund altered its Japanese equity strategy earlier this month, adding new managers and strategies—including smart beta. It is also said to be planning active investments in a wider range of foreign bonds.

Ito has already held meetings with cabinet ministers to monitor GPIF’s progress and will meet them another two or three times, he told Bloomberg.

“The cabinet is the driver of change” for GPIF, Ito said. “The cabinet is going to keep pushing.”

Yields on 10-year Japanese sovereign debt stood at 0.61% yesterday, the lowest rate in the world, data compiled by Bloomberg showed. Ito is keen for GPIF to reduce its exposure to long-dated Japanese gilts as their prices are more sensitive to inflation.

It isn’t the first time Ito has called for GPIF to sell off some of its domestic bonds—he made the same call back in December 2013. But the suggestion was publicly rebuffed by the pension fund’s president and aiCIO Power 100 member Takahiro Mitani.

The central bank, which is buying more than ¥7 trillion of bonds a month, will fail in its goal of spurring 2% inflation, and the risk of owning so much domestic debt was overstated by Ito’s panel, Mitani said in December.

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