A few years ago, the Japanese government made an announcement that went unnoticed by many market pundits. Since then, although there have been a few strategists who have speculated on its impact on risk assets, on the whole, it’s not something that gets a tremendous amount of attention. And that’s a mistake because it has had an immense effect on markets.
In October of 2014, the world’s largest pension plan, the enormous Japanese GPIF (Government Pension Investment Fund) reported a dramatic shift in their asset mix. From the FT:
A long-awaited overhaul of Japan’s national pension fund surpassed investors’ expectations on Friday, as the world’s largest institutional investor said it would put half of its assets in stocks while cutting its government bond holdings by a third.
The reshuffle of the Government Pension Investment Fund, apparently timed to maximise the impact of another shot of monetary stimulus from the Bank of Japan, was the result of almost two years of pressure from the administration of Shinzo Abe, prime minister.
Mr Abe has been keen to see the GPIF adopt a much more aggressive approach in managing its Y127tn ($1.14tn) in assets, in order both to meet the rising cost of pension payouts and to support his broad programme to haul Japan out of years of deflation. Since being cut free of direct state control in 2006, the GPIF has stashed most of its money in low-yielding government bonds, with almost all of the rest managed passively.
Under its new asset mix announced on Friday evening, the GPIF will cut its allocation to domestic bonds to 35 per cent from 60 per cent, while upping its share of domestic stocks from 12 per cent to 25 per cent. International bonds will climb from 11 per cent to 15 per cent, while international stocks will rise to 25 per cent, from 12 per cent. The old 5 per cent allocation to short-term debt has been scrapped.
The new allocations – which allow swings of about one-third in either direction to take account of market movements – were more aggressive than the market had anticipated.
Analysts said the 25 per cent allocation to domestic stocks, in particular – higher than earlier soundings of 20 per cent, which implied about Y7tn of inflows – could rekindle foreign investors’ interest in the Japanese market, which has waned this year after record net buying in 2013.
On Friday the Topix gained more than 4 per cent while the yen approached a seven-year low of 112 against the US dollar, after investors digested a story on the GPIF’s planned shift in the Nikkei newspaper and then the surprise expansion of the BoJ’s already-aggressive easing programme after lunch.
Analysts noted that the BoJ had committed to buying another Y30tn of government bonds each year – roughly equivalent to the Y34tn to be offloaded by the GPIF under its new asset mix, according to Goldman Sachs calculations.
