Japan’s Pension War

Abenomics Confronts GPIF


It’s a mountain of money the size of Mexico’s economy. It could buy Apple, Exxon Mobil and Toyota and still have change. Japan’s Government Pension Investment Fund is the world’s biggest state investor — trumping all managed government retirement and sovereign wealth funds — and the way it spends its staggering $1.1 trillion can roil global markets.  Japan’s leaders want the bureaucrats who oversee its sleepy strategy to plow more money into risky investments, aiming to stimulate the economy and finance pensions in the world’s most rapidly aging society. Opponents accuse them of favoring the stock market and their own approval ratings over pension security.

The Situation

The fund will buy more local and foreign stocks and aims to cut the share of Japanese bonds in its portfolio to 35 percent as part of a strategy revamp announced Oct. 31. Until recently, more than half of the fund’s assets were invested in Japanese bonds, mainly government debt paying the lowest sovereign yield on the planet. The government wants to free GPIF from its current master, the Health Ministry, and has pushed the fund to broaden assets, hire proper investment professionals and use its might to push companies to increase profits. It’s one front in Prime Minister Shinzo Abe’s drive known as Abenomics to spur inflation and jolt Japan out of its two-decade-long economic slump. Higher consumer prices are already eroding the spending power of the measly payments from the country’s bonds. Add Japan’s demographic predicament — a shrinking population and a record number of people over 65 — and it’s clear that the fund must change. Investors the world over are taking note: Shifting GPIF’s asset allocation will pump an estimated $181 billion into global markets as money is redirected, though the fund didn’t give a time frame for the move.

Source: GPIF
Source: GPIF

The Background

GPIF invests for the two main state retirement systems, covering most pension savers in Japan. The fund pays more to retirees than it receives in contributions, and its returns have lagged peers that have more aggressive strategies. It earned an average of 2.8 percent in the nine years through March 2013. That compares with 5.2 percent for Norway’s Government Pension Fund Global and 7.3 percent for the California Public Employees’ Retirement System, or Calpers, the biggest managed U.S. fund. Norway is also trying to boost returns on its $849 billion hoard, which is fed by the country’s oil riches and is the biggest sovereign wealth fund. The $2.7 trillion U.S. Social Security Trust Fund has twice the assets of GPIF, though it isn’t actively managed and invests only in U.S. Treasuries. In 2005, President George W. Bush proposed a partial privatization of the fund to keep it solvent and was quickly shot down. Had it gone through, U.S. retirees would have had much more at stake when the 2008 financial crisis sent stocks tumbling.

As of May 29, 2014.  Source: Bloomberg, P&I/Towers Watson, fund websites
As of May 29, 2014. Source: Bloomberg, P&I/Towers Watson, fund websites

The Argument

GPIF’s managers argue that the fund’s sole responsibility is to Japan’s past and present workers and that it must not stray from its central mission. Returns have beaten growth in wages, which haven’t risen more than 1 percent annually since 1997, and Takahiro Mitani, GPIF’s president, insists that inflation isn’t the threat some think it is. The fund shouldn’t be hijacked by politicians to reignite a stalled rally in the nation’s stocks, he says. Lawmakers’ plans to change GPIF are part of a broader drive to reshape Japan. With the return on equity of Japanese companies stuck at just over half the global average, a new government stewardship code is encouraging the country’s hitherto silent institutions to press companies they own to improve. Tokyo’s stock exchange has also introduced an index of companies that reward shareholders well, partly to guide GPIF on what to buy. The fund has trimmed its bond holdings in the last year while taking small steps on the road to reform, like removing a cap on salaries for investment experts and hiring an activist fund to help with stock management. GPIF’s move to buy more stocks and riskier assets marks a bigger shift. Another is expected when Abe’s government puts forward legislation to create a board of directors to take power from the fund’s president.

The Reference Shelf

  • A Bloomberg ranking of the world’s biggest managed pension funds.
  • Bloomberg News QuickTake on Abenomics.
  • The report of a panel reviewing Japan’s public pensions.
  • GPIF’s quarterly report for the three months ended Sept. 30, 2014 and its statement on revamping investments in Japan’s stock market.

First Published June 3, 2014

To contact the writer of this QuickTake:

Tom Redmond in Tokyo at tredmond3@bloomberg.net

To contact the editor responsible for this QuickTake:

Leah Harrison Singer at lharrison@bloomberg.net