Abe’s third arrow

From the risk-seeking actions of the world’s biggest pension fund to the unique approach to corporate governance and stewardship, Japan’s markets are being transformed by Abenomics. Chris Panteli reports.

“In the typical Japanese corporate view of stakeholder capitalism, shareholders were ranked so far below customers, employees and global society in general, that they had become all but invisible. Things are, however, changing.”

Dan Mannix

Having secured victory in Japan’s snap election  late last year, Japan’s prime minister Shinzo Abe  has now set about implement the “third arrow”  of Abenomics with far less obstruction.

This is the final stage of the much-heralded  project  set out in December 2012, aimed at lifting  Japan from its decades-long state of stagnation  using his “three arrows” of fiscal stimulus, monetary  easing and structural reforms.

So far the arrows of Abenomics have hit most of  their intended targets, with one piercing the skin  of Japan’s sleeping giant, the Government  Pension  Investment Fund (GPIF), and sending it  roaring into action. With ¥128.6trn ($1.25trn) of  assets under management, the GPIF is not only  the world’s biggest pension fund but also the  largest public sector investor anywhere. Despite  its mountains of wealth however, the fund has  been extremely conservative with its investment  strategy: up until the advent of Abenomics,  around two thirds of assets were in Japanese  government  bonds (JGBs) and when it did invest  in the markets it did so passively.

Abe has been keen to see the GPIF finally flex its  muscles and help revive Japan’s economy, however,  and that means taking more risk. Over the  past two years, the fund has reduced its holdings  in JGBs from 62% of the portfolio in March 2013  to 49.6% as of Q3 2014, the first time its allocation  to JGBs has made up less than half of assets.  The  resulting ¥8trn has instead been invested  in local  and foreign shares, with plans for allocations to  alternatives such as private equity  and infrastructure  already underway.

Threadneedle Investments Japanese Equity fund  manager Sarah Williams is quick to point out  however that this is far from a quick push for  growth. Instead, the move should be seen as the  GPIF’s rational response to the current economic  environment.

She says: “It’s not as though they’re making a  direct  switch from JGBs to Japanese equities. It’s  more a diversification of the whole portfolio. It’s  rational, and that’s the big thing about this: it was  rational, when Japan was in deflation, to have a  very high allocation to JGBs.

“Nobody would want it to look like it was the government  saying to the GPIF: ‘You must buy more  equities’. If Japan comes out of deflation it’s  more rational to have a higher allocation to  equities.”

While the move away from JGBs is a radical step  for the fund, it is still very much in the low end of  the target ranges set out for risk asset allocation,  with much still to be done.

The GPIF is also undergoing structural changes  beyond the portfolio. A recent National Diet  session  was convened to discuss the GPIF  Reform  Act, outlining plans to broaden the number  of decision-makers within the fund.

“Authority for the GPIF’s decision-making is  going  to be under the auspices of a panel of  several  directors rather than the current system  where sole responsibility rests with the president,”  the Diet briefing notes add.