Tags: Japan | Abe | Risks | Pensions

Japan's Prime Minister Courts New Risk With Plan to Jolt Public Pensions

Wednesday, 05 June 2013 07:38 AM

Prime Minister Shinzo Abe could be about to take the biggest bet of his six-month old administration — sucking the savings of the country's notoriously risk-averse and fast ageing constituents out of the relative safe haven of government bonds.

He could announce the move as soon as Wednesday as part of a package of measures designed to kick economic growth into a higher gear. The prime minister has already pushed through $100 billion in government spending and shaken up monetary policy by prodding the Bank of Japan into a $1.4 trillion stimulus effort.

Having long prescribed "bold" economic measures to turn around 15 years of grinding deflation and sluggish economic growth, he now wants the nation's public pensions to take more risk with their $2 trillion pool of funds.

It is a policy that directly affects tens of millions of Japanese workers and pensioners in a country that is very conscious of how rapidly it is ageing. A government survey last year estimated those aged 65 or over would double by 2060.

"The government is trying to do this with pension money," said Nobusuke Tamaki, a professor at Otsuma Women's University and a former director general of the country's biggest public pensions fund, the Government Pension Investment Fund (GPIF).

"But how would the public at large feel if their pensions suffer huge losses? Politicians need to talk to the public about this and debate the issue in an intensive way."

Shifting hundreds of billions of dollars from bonds into riskier assets, such as equities or infrastructure financing, also risks disrupting markets, already jittery following two weeks of volatility and some analysts questioned if the public funds had the expertise to manage greater investment risk.

The justification is that nudging GPIF and dozens of other public and semi-public funds to diversify could increase returns while supporting Abe's push to drive Japan out of its deflationary spiral.


GPIF's returns have lagged some other big national pension funds and its asset allocation is more risk averse.

It hit its own internal return targets in recent years, a payout of 1.1 percentage point over wage increases in the economy. But it has been helped in that by falling salaries.

Wages have dropped by almost a percent per year over the past nine years. GPIF's total return on investment over the same period averaged 2.4 percent a year based on a target portfolio that allocates two-thirds of the fund to domestic bonds.

But it has underperformed funds like Canada's Pension Plan Investment Board, with $183 billion in assets, and Norway's $686 billion pool of government savings from petroleum revenue known as the Government Pension Fund Global. Both these funds allocate most of their money to equities.

Norway's GPFG, for example, has a 60 percent weighting in equity markets and 40 percent in bonds and real estate. It returned almost 6 percent a year over the past decade.

Critics have long said GPIF lacks the staff, budget or investment mandate to keep pace with other large public funds.

It has more than $1 trillion under management, but only about 70 staff working from a non-descript office in Tokyo's Kasumigaseki district.

An advisory panel to the pension fund had been working on proposed changes to its investment strategy since April, before the Abe-backed reform proposals surfaced.

With its bureaucratic-payscale, the fund also lacks the ability to lure star fund managers. The highest paid employee is the chairman, Takahiro Mitani, who made the equivalent of $192,000 for the fiscal year ended March 2012.


Professor Tamaki said it is uncertain if Abe can convince the Japanese public to support the kinds of reforms needed to make it more like counterparts in Canada or Norway.

"We would have to budget to hire professionals and that won't be cheap," he said. "Very importantly, the government should set up a means to govern and evaluate those new professional fund managers to convince the Japanese public. That won't be easy."

Even with its conservative portfolio, GPIF took a loss of almost 8 percent in 2008 during the global financial crisis.

A higher weighting on equities would mean accepting higher risk in a crisis, a potentially unpopular choice in Japan where many chose to keep savings in almost interest-free bank deposits.

There is also the risk to the Japanese government bond (JGB) market just as it is trying to adjust to huge bond buying by the more activist Bank of Japan, a reason behind recent volatility.

Shifting to the bond-weighting of Norway or Canada would mean GPIF pulling 27 trillion yen ($272 billion) from the JGB market. That would be over half of the amount of additional JGBs that the Bank of Japan has pledged to buy this year as part of a massive round of asset purchases under its stimulus program.

At the same time, GPIF would have to invest another 45 trillion yen ($454 billion) in equities to match the portfolio of its international peers in Canada and Norway.

The scale of the shift means any changes would have to be gradual, analysts said.

"Pension funds tend to play it safe," said Toshihiko Matsuno, senior strategist at SMBC Friend Securities. "It's too early to believe that pension funds are aggressively chasing the market higher."


Abe's also faces losing some hard-won credibility with markets. Talk of the shift in pension fund investment strategy is emerging at a time when the Nikkei average, Japan's benchmark stock index, has been in retreat and near six-week lows.

It is still up more than 50 percent since Abe started pushing his brand of economic policies, but investors are uncertain about the shape of his growth strategy for the future.

Abe is expected to announce the setting up of special economic zones, targets for domestic private-sector investment and a doubling of farm exports. But analysts say he will avoid major reforms, such as big deregulation or labor reform ahead of an upper-house election in July.

With that vote looming, some questioned whether Abe's team was resorting to the kind of tactics that previous Liberal Democratic Party administrations had tried and famously failed to make work.

In the early 1990s, the pension savings that were later organized into GPIF were a regular target for finance ministry officials who tried to support stock prices with public funds.

The policies — known as "Price Keeping Operations" in a play on the United Nations' organized Peace Keeping Operations — failed and even backfired by encouraging banks to hold riskier assets, said Junji Narita, a professor at Aoyama Gakuin, who has studied the period.

Many say the key is what Abe does on other aspects of economic reform.

"Tweaking pension funds' investment policy is a step forward but it has to be accompanied by structural changes," said Xiao Minjie, an independent economist in Tokyo. "There have to be strategies to make domestic investors feel justified in investing in home markets."

He added: "Markets are desperately looking for that kind of detail."

© 2021 Thomson/Reuters. All rights reserved.

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Prime Minister Shinzo Abe could be about to take the biggest bet of his six-month old administration - sucking the savings of the country's notoriously risk-averse and fast ageing constituents out of the relative safe haven of government bonds. He could announce the move as...
Wednesday, 05 June 2013 07:38 AM
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