Last week I was fortunate enough to spend a few days in Tokyo, where I took part in the Threadneedle Investments Conference.
While there I spoke to representatives from the Bank of Japan and global companies such as advertising agency Dentsu and electronics giant Sony. While they had different experiences to share, all spoke positively about the effects of Abenomics.
Since winning his second term in December 2012, prime minister Shinzo Abe has set about 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 many 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. Despite its mountains of wealth however, the fund is extremely conservative with its investment strategy: around two thirds of assets are in Japanese government bonds (JGBs) and when it does invest in the markets it does so passively.
Abe is keen to see the GPIF finally flex its muscles and help revive Japan’s economy, however, and that means taking more risk. As a result, the fund reduced its holdings in Japanese government bonds from 62% of the portfolio in March 2013 to 55% by December, with the resulting ¥8trn going into local and foreign shares. It was perhaps no coincidence that Japan’s stockmarket was one the best-performing in the developed world that year.
The appetite for risk is set to continue, with a portfolio reshuffle expected in the autumn. Currently, both domestic and foreign stocks each make up around 12% of the fund’s investment, but under changes outlined by the GPIF investment committee, these are set to rise to 17% each (around ¥22trn in total). Holdings in JGBs will continue to fall to around 40% and the committee is also considering the creation of a new category to allow for alternative investments such as infrastructure.
There is of course a flip side to this good news story, and that’s the concern of JGB holders fearful of the potential impact of on prices resulting in such a huge sell off. The Bank of Japan is confident that there are enough large institutions – including the Bank itself while the government’s quantitative easing programme continues – to soak up the resulting JGBs without difficulty.
My time in Tokyo highlighted a growing recognition of the latent power of pension funds and how their sizeable assets can be used for the greater good, although this should never endanger their primary objective. Yet, at a time when the workforce is still divided between the haves and the have nots of defined benefit and defined contribution provision, one way or another we all might benefit from bold pension investment.
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