Government Panel Suggests GPIF Status Change

The below is a DJ article on the press conference on the interim report by the government-appointed advisory panel, which name in direct translation is "an expert panel for an advanced / more sophisticated investment, risk management, etc., of public and quasi-public funds". It is interesting to note that the DJ article refers to private equity and infrastructure and other Japanese media cited real estate and infrastructure as potential avenue to increase GPIF's portfolio diversification. What is not explicitly reported in the DJ article, however, is that the panel has discussed and is likely to propose a change of GPIF's legal status from the current ”independent administrative corporation” to "permitted corporation" - the same status as the Bank of Japan. Such change would give more free hand to GPIF and help the institution to evolve itself closer to its global peers.

Thursday, September 26, 2013
DJ: Panel Tells Japan's Public Pensions To Fix Bond-Heavy Portfolios
TOKYO--Japan took a step toward revamping its over Y160 trillion ($1.6 trillion) public-pension system on Thursday, with a government-appointed advisory panel suggesting a shift in money from government bonds to higher returning assets like real estate and private equity.

Many members of the panel were also in favor of looking into using financial products like derivatives to protect against fluctuations in the market and attracting skilled investment professionals by increasing the salaries on the payrolls of each of the funds.

The ideas, which were unveiled in the panel's preliminary report, are still largely abstract and under discussion. Even after the panel's recommendations come out later this year, they'll have to be approved and implemented by the Japanese government.

Yet the steps could, if implemented, signal a sea change in how those trillions of yen are invested, unleashing a flood of cash into global markets as well as the Japanese economy. On Thursday, the yen strengthened against the dollar on mere speculation on what the report could say.

"If you reform portfolios and governance, you can manage assets in a way that contributes to Japan's growth," Takatoshi Ito, a professor of economics at the University of Tokyo and head of the seven-person panel, told reporters after the release.

Prime Minister Shinzo Abe has also singled out reform of the public pension system -- in particular the Y120 trillion Government Pension Investment Fund -- as key to Japan's long-term economic recovery, after two decades of stagnation. Around 60% of the GPIF's money is now in low-yielding Japanese bonds because public opinion has been overwhelmingly in favor of avoiding losses from assets viewed as having higher risks, such as stocks.

Yet the panel's report urged public pensions to quickly respond to the risks of a bond-heavy portfolio as the government and central bank are working to end 15 years of falling prices. Inflation is the enemy of bonds because rising prices erode the value of the bond's fixed interest payments and principal.

"Up until now we were in deflation, but are moving into inflation," said Mr. Ito.

If the GPIF is remade in line with global peers, with professional and independent management that actively searches for the best returns, that could affect everything from the government's fiscal health to the amount of money that flows into the country's stocks and real estate to the amount of pressure investors put on Japanese companies to perform well.

An activist GPIF, for instance, might finally be able to make Japanese corporations more transparent and responsive to investors, said Masaaki Kanno, chief economist at JP Morgan in Tokyo and a member of the panel.

The panel members were in consensus about reducing bond holdings, and most agree the panel needs to invest in a diversity of assets, including infrastructure and private equity. Asset managers say that could also be a cue for other domestic institutional investors to look into diversifying their own portfolios.

"It doesn't say anywhere in here, 'Increase bond investments.' But you can read 'reform bond-centric portfolios,' as 'it's better to lower the percentage of bond holdings," said Mr. Ito when asked whether the panel's suggestions could mean more money in Japanese stocks. "But I don't think we as a panel will go as far as to say" specifically how much of other assets holdings to increase to make up for a decrease in bond holdings.

Funds could "look at returns and volatility over a five or 10 year span, and think not simply about making and holding a portfolio, but whether there's something better out there," said Mr. Ito. "It's something only pensions can do."

The panel did not, however, come to a final decision about issues surrounding how much of a say the funds should have in their investment decisions, whether the funds should be headed by just one president, and how much of a say those covered by the plans should have in their investment decisions.

Mr. Ito said that the panel would submit its final recommendations in November.