Japan's GPIF Urged to Boost Domestic PE, VC Investments.

A group of ruling-party members of Japan’s House of Representatives is proposing major financial reform to turn the country into an “asset management nation,” while calling on its $1.7 trillion Government Pension Investment Fund to boost investments in domestic assets.

“The international market is facing uncertainties such as political trends in various countries and geopolitical risks,” according to a proposal posted on the website of Kobayashi Fumiaki, a Liberal Democratic Party member of Japan’s House. “We are now at a historic turning point in the financial and economic environment. It is becoming increasingly important to promote policies to make Japan an asset management nation.”

The proposal also stated that to transform Japan’s capital markets into a “two-way platform where domestic people can invest overseas and attract investment from around the world, we must promote structural reform of the economy and society with asset management at its core.” It also recommended that the Financial Services Agency, Japan’s main financial regulator, should market “the attractiveness of the Japanese market to overseas audiences.”

As part of its proposal, the group said the GPIF should increase its investments in alternative assets, particularly private equity and venture capital, “without leaning too much to any particular asset class.” It also called for the Japanese government to adjust the private equity tax structure, “which is a barrier to investment in domestic VCs.”

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Tilting the GPIF’s investments toward domestic equities and away from foreign ones might provide better returns, if recent performance is any indicator. Although domestic equities underperformed foreign equities 5.35% to 8.96% for the third quarter of fiscal 2024, the most recent results available, they have outperformed their foreign counterparts over the past two fiscal years.

Domestic equities were GPIF’s top performer in fiscal 2022 with a 5.54% return that easily outperformed a 1.84% return for foreign equities. In fiscal 2023, domestic equities were again the top-performing assets, returning 41.41%—135 basis greater than foreign equities’ 40.06% gain.

However, a shift toward more domestic bond holdings could hurt the pension fund more than an equity adjustment would help, as domestic bonds have been crushed by foreign bonds’ performance over the past two years. In fiscal 2022, Japanese bonds lost 1.74%, compared with a 0.12% loss for foreign bonds held by the GPIF. In fiscal 2023, the GPIF’s domestic bond holdings lost 2%, while its foreign bonds returned 15.83%.

As of the end of September 2024, the pension fund’s asset allocation was 25.51% to domestic bonds, 24.99% to domestic equities, 24.58% to foreign bonds, and 24.93% to foreign equities.