Japan’s government is readying to unfetter its huge public pension fund, freeing managers to dump low-yield sovereign bonds and go in search of higher, but riskier returns, in a move that could see cash flood global markets.
The nation’s pension program, into which almost all citizens pay, is supported by the world’s largest investment fund, worth US$1.26 trillion — equivalent to one-quarter of the country’s entire economy.
It towers over its nearest competitor — the US$700 billion belonging to Norway — and is multiples of the US$173 billion holdings of Temasek, the Singaporean sovereign wealth fund.
However, unlike some other more adventurous vehicles, the Government Pension Investment Fund (GPIF) keeps by far the majority of its cash in super-safe — and super low return — Japanese government bonds.
Now all that could be about to change, as Japanese Prime Minister Shinzo Abe shuffles into place the next piece of his “Abenomics” jigsaw puzzle.
The bid to shake up Japan’s slumbering economy after two decades of drift began early last year with a huge public spending bonanza and unprecedented monetary easing from the Bank of Japan.
However, 18 months down the line, the initial sugar rush is fading and Abe must now put in place some of the structural reforms he — and most economists — say are necessary.
Not least of which is getting more bang for the buck on the public pension fund to help a shrinking number of workers pay for a growing number of retirees.
About half of Japan’s social security budget goes on pensions, a figure equal to about 12 percent of the entire economy. Bolstering the performance of the reserve fund would take pressure off the public purse.
Earlier this month, Abe reportedly instructed his welfare minister to review the fund’s operating portfolio, urging it to make more aggressive investments in foreign and domestic stock markets.
The knock-on effect, analysts said, could be huge.
“Moving just 1 percent of the fund onto stock markets — there goes more than ￥1 trillion [US$9.8 billion] right there,” NLI Research Institute senior economist Tsuyoshi Ueno said.
If, as some observers expect, GPIF increases the share of assets in domestic stocks by 5 percentage points, that would inundate the Tokyo bourses with about ￥6 trillion — half the total value of all foreign investment in the markets, Ueno said.
The fund currently holds 60 percent of its assets in domestic bonds, with 12 percent each in foreign and domestic stocks and 11 percent in foreign bonds, according to its Web site.
Holdings also include cash and other assets.
Yasuhiro Yonezawa, head of the fund’s investment committee, told the Wall Street Journal last week that domestic bonds could, in future, account for just 40 percent, with the difference made up by extra foreign bonds and by stocks, both at home and abroad.