Japan Pension Ponders Nikkei-Boosting Game-Changer

Rumours of Japan's public pension fund - a pool of more than $1 trillion - is considering allowing investment in domestic stocks to grow with a rallying market.

(May 30, 2013) – The world’s largest pension fund is considering revising its investment strategy in a move which would provide a huge boost to the value of the Nikkei index.

A report on Reuters, so far unconfirmed, claims Prime Minister Shinzo Abe is investigating changing Japan’s public pension fund’s investment rules to allow it to take a greater holding in domestic equities, thereby taking full advantage of the recent rally.

Granted, the rally has tailed off in the past week, but the long-term prospects for Japanese stocks remain healthy-looking, and this would be the latest in a series of game-changing policy decisions from Mr Abe.

To implement the changes, the Government Pension Investment Fund (GPIF) would be required to change the way it assesses the potential risk and return on assets, giving it more flexibility.

Currently, the fund’s exposure to domestic bonds are at the lowest allowable level, and its exposure to overseas stocks are at the highest allowable level, according to Reuters.

The GPIF held 64% of its assets in domestic bonds, 11% in domestic stocks, 9.0% in international bonds, and 12% in international stocks, with the remainder in short-term assets, as of September 2012.

If changes to the investment limits aren’t amended, the pension fund could be forced to buy yet more Japanese government bonds, already the biggest part of its portfolio by far, in a weak and volatile market.

Disastrously, it could also be forced to sell off Japanese stocks in an equity market that has rallied more than 60% since November.

Last month, aiCIO revealed a large number of Japanese pension funds were decreasing their allocation to domestic bonds for the first time in years, favouring overseas bonds for their better yields after becoming concerned about the extremely low interest rates brought about by Abe-nomics and the Bank of Japan’s extreme easing policy.

Separately, the Bank of America Merrill Lynch found the Japanese central bank’s efforts to fuel growth and weaken its currency – dubbed Abenomics in the press – had sufficiently wooed investors. Allocations to Japanese equities are at their highest since May 2006 with a net 31% of global asset allocators overweight Japanese equities. That is up sharply from a net 20% overweight in April.

GPIF Chairman Takahiro Mitani had already announced that the public pension would review its long-term investment target and portfolio model back in February – if the result of that review is to allow the pension fund greater exposure to domestic stock, the impact on the Nikkei’s value will be significant.