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Japan s giant pension fund

That sinking feeling

Volatile stockmarkets spell pressure for the GPIF and its new leadership

May 28th 2016 | TOKYO

THE fear that a creaking pension system will fail to provide for swelling ranks

of retirees is held by some economists to be one reason why many Japanese

prefer hoarding their cash to spending it. Any meddling with the 140 trillion

($1.27 trillion) pot that funds the state pension is politically fraught as

Hiromichi Mizuno, the first chief investment officer of the ultra-conservative

Government Pension Investment Fund (GPIF), is finding out.

In October 2014 the GPIF made an historic shift in its asset allocation,

trimming its pile of Japanese government bonds and doubling its holding of

stocks (see chart). For the next three quarters, its returns duly rose along

with stockmarkets. In the financial year that ended on March 31st 2015 the fund

made its highest-ever return, of 12.27%. The intention, however, was not so

much to juice returns as to prepare for the return of inflation. The Bank of

Japan s massive monetary easing was supposed to be on the verge of pushing

prices up again after a decade of deflation, thereby eroding the value of

Japanese bonds.

Since those heady beginnings, however, Japanese shares, and some foreign ones,

have sunk. The yen has also strengthened, lowering the value of foreign assets.

That has left the fund, which is the world s biggest pension pot, with a loss

that analysts estimate at over 5 trillion for the most recent fiscal year.

In the meantime, the inflation on which the new investment strategy was

premised has not appeared. We built a new portfolio allocation on a base case

that the BoJ would generate 2% inflation within two years, but the base case

may have changed, says Mr Mizuno. Prices are currently falling, and the BoJ

now says it may not reach its target before early 2018.

Mr Mizuno was unprepared for the bashing now coming the GPIF s way. He joined

from a private-equity firm in London and told friends last year that moving to

the GPIF was rather like swapping a Ferrari for a tricycle. It has come as a

shock that not only is the GPIF unsophisticated in its investing approach (it

has recently been barred from developing the kind of in-house share-buying

capability that other, large institutional investors possess), but also that

politicians and the media are so ready to accuse it of gambling.

Shinzo Abe, Japan s prime minister, was among the most ardent advocates of the

shift in the fund s asset allocation. He recently noted that long-term results,

not short-term volatility, are what matter. But it does not help that he has

also raised the prospect of lower pensions if the GPIF s losses grow. Many

critics of the shift, including its president at the time, Takahiro Mitani,

claimed the government instigated it to pump up the stockmarket. The GPIF,

which normally publishes its annual results in early July, has postponed them

until the end of the month, after an election for the upper house of the Diet.

The delay is a clear sign of political interference, says Jesper Koll of

WisdomTree, an exchange-traded fund manager in Tokyo.

Mr Mizuno says the GPIF may have to adjust its portfolio again in light of the

lack of inflation. In all likelihood, that would entail a shift out of equities

and back into Japanese government bonds. Such a move would be a big

embarrassment for the BoJ. But the GPIF may yet decide to stick to its current

allocation. Later this year, notes Takatoshi Ito, an adviser to the government

on the fund, the powers of its board will be strengthened, making it easier to

withstand public criticism about short-term losses. And should Japan ever

vanquish inflation, its pensioners will still want a hedge against all those

expensive government bonds.