Time to Hedge? Japan’s Pension Doesn’t Think So

Japan’s $1.1 trillion pension fund is refusing to hedge against a stronger yen despite the risks this poses to its growing pool of overseas assets.

The Government Pension Investment Fund (GPIF)—the world’s biggest pension fund—overhauled its strategy last year, buying into Prime Minister Shinzo Abe’s economic plan to boost inflation and weaken the yen. A weaker domestic currency would aid foreign holdings as well as some Japanese equities, asset classes to which the GPIF is increasing exposure.

“We wouldn’t hedge based on a forecast.” —Shinichirou Mori, GPIFHowever, Junko Shimizu, a professor at Gakushuin University and a member of the GPIF’s investment committee, told Bloomberg it was “unbelievable” that the pension had not moved to hedge the risk of the yen strengthening relative to other currencies. “My personal opinion is that they should look to hedge,” she added.

Shinichirou Mori, director of the planning department at the GPIF, said the pension did not make decisions “based on currency forecasts. We wouldn’t hedge based on a forecast.”

Currency volatility has risen dramatically in 2015 as a number of central banks have moved to ease policy. The European Central Bank introduced quantitative easing (QE) last month, shortly after Switzerland removed its peg to the euro. Sweden also moved to buy government bonds in its own form of QE announced this week, while Canada and Australia have also eased policy by cutting interest rates.

Movements in the yen can have a major impact on the gains or losses made by different asset classes: According to a Towers Watson survey of global pension funds published this week, Japan’s pension fund assets declined by 1.2% in dollar terms during 2014, but in local currency terms assets swelled by 12.7%.

Shimizu argued that the GPIF could “combine cash, futures, and options as a way of hedging currencies,” but admitted the pension’s massive size could hinder this effort.

“With the fund’s assets being so big, we have a problem with whether the market can absorb it if we start doing things such as currency futures,” said the GPIF’s Mori.

The GPIF has undertaken a major portfolio overhaul in the past few months since announcing a new target asset allocation in October. The fund’s target exposure to Japanese bonds was slashed to 35%, from 60% previously. International and domestic equity holdings were doubled to a new target allocation of 25% each, up from 12%. Last week the GPIF appointed Schroders, Daiwa, Nomura, and UBS to run new Japanese equity mandates.