Japan’s giant pension fund unlikely to see JGB yields surge
Government Pension Investment Fund (GPIF) Chairman Takahiro Mitani speaks during an interview with Reuters in Tokyo April 6, 2012. — Reuters picTOKYO, April 6 — Japan's $1.3 trillion (RM3.9 trillion) Government Pension Investment Fund, the world's biggest public pension, said yields on Japanese government bonds are unlikely to surge for a while as there is plenty of demand from cash-rich domestic banks. Takahiro Mitani, chairman of the GPIF, said the environment for JGBs will remain favorable for some time as the country stays in a deflationary phase and it may take a lot of time for the economy to grow more than 1 percent on a sustainabe basis.
“I don't think (JGB yields) will fall sharply from the current level. They are near their lows, but the yields are not expected to surge from here,” Mitani told Reuters in an interview today.
Mitani also said domestic corporate earnings will be healthy and companies will have ample cash on hand thanks to the Bank of Japan's monetary easing and the recent weakening of the yen.
This would increase cash positions of banks and would lead to more funds moving into JGBs, he added.
However, there is a risk for JGBs if the government fails to implement its plans to raise the consumption tax, he said.
Japan's government submitted laws last week to double its sales tax by 2015 to fund swelling social security costs in the world's fastest-ageing nation, setting up a showdown that could split the ruling party, force early elections and deepen policy paralysis.
Mitani said the high oil prices and tensions between Iran and Israel could be another risk for JGBs.
The GPIF invests reserves of national and corporate pension plans. It allocates about two-thirds of its assets to JGBs, where the yield on benchmark 10-year bonds is languishing below 1 per cent.
Mitani said economic conditions in the United States and Japan were improving and conditions in Europe were better than in November, after the European Central Bank implemented strong measures to keep the region's debt crisis from spiraling out of control.
In regards to the pension fund's investment performance, the GPIF may have posted a positive investment return during the previous financial year that ended in March, Mitani said.
The fall of the yen during January appeared to have helped the public fund's investment, he said.
The public fund's holding of foreign shares helped the fund generate a positive investment return in the October-December quarter of 0.58 per cent, for an investment gain of 619 billion yen (RM22.4 billion).
However, its rate of return in the nine months to December was minus 2.5 per cent, losing 2.87 trillion yen.
The actual performance figures for 2011/12 are expected to be released mid-year.
Seek higher returns
The GPIF, which is under pressure to raise returns to cope with the growing number of pensioners, is closely watched by markets as its 108.1 trillion yen portfolio is nearly as big as the economy of Spain.
In the year to March 2013, when the first wave of Japan's baby boomers is set to turn 65 and becomes eligible to receive pension payments, the public fund would need about 8.87 trillion yen of cash for pension payouts.
Mitani said the amount of cash needed to repay pension recipients appeared to be getting larger than the original forecast compiled by the government three years ago.
Along with more retirees, fewer people are contributing to public pension plans. Lower salaries and companies hiring fewer full-time employees are limiting inflows into the public pension scheme, Mitani said.
In the year to March 2011, the GPIF sold 4.77 trillion yen worth of assets, made up of 4.37 trillion yen in domestic bonds and 405 billion yen in foreign equities.
The actual cash sales for 2011/12 are expected to be released mid-year, along with the investment performance.
With a view to boosting returns, the GPIF hopes to begin long-awaited investments in emerging market equities from the April-June quarter or the following quarter, and it is continuing to study opportunities to diversify further, Mitani said.
The GPIF has already selected asset managers to supervise its investments in emerging market, although opening up accounts in emerging countries was taking more time than it would in developed countries, the chairman said.
The GPIF originally planned to begin investment in emerging markets equities by the end of March.
Sources had said in September that 11 companies were on the final shortlist to supervise investments into emerging markets equities for the GPIF.
Mitani did not say how much the fund would invest in emerging market equities, but noted the initial amount would be small.
Insider trade
Closer to home, the GPIF was concerned about an insider trading probe involving Sumitomo Mitsui Trust Bank (SMTB) as the public fund entrusts a large amount of cash to the trust bank's asset arm to supervise investments in domestic bonds and stocks, Mitani said.
Japan's securities regulator recommended last month a 50,000 yen fine against Chuo Mitsui Asset Trust Banking, saying the asset manager sold Inpex shares after a tip-off about its plans for a $6 billion offering in 2010.
SMTB was created this month through a merger of Chuo Mitsui Asset Trust and Banking and two other banks under Sumitomo Mitsui Trust Holdings.
“We are not considering totally removing (SMTB) from our mandate, but it is possible that we may refrain from allocating new funds in it for a certain period of time,” Mitani said.
“We need to watch what kind of measures would be taken by authorities. By looking at their action, we will decide on what kind of measures we would take,” Mitani said. — Reuters
