[TOKYO] Negative interest rates are forcing a Japanese pension fund to adopt a riskier investment strategy.
The National Federation of Mutual Aid Association for Municipal Personnel, with total assets under management of about 11 trillion yen (S$142.6 billion), is considering buying more regional government bonds and state-backed organizations' debt, according to people familiar with the issue.
The Tokyo-based organisation, which manages pensions and provides services for about 1.16 million municipal employees, began on July 1 to recruit managers who will be given more freedom to deviate from the Nomura-BPI index that the fund tracks.
The Bank of Japan's negative-rate policy has pushed the Nomura-BPI index yield below zero, causing headaches for fund managers that use it as benchmark to allocate assets for retirement funds in the world's fastest-aging population.
The BOJ so far hasn't purchased regional government bonds as part of its debt-buying monetary stimulus, helping keep yields on debt in the 58 trillion yen market generally above zero.
"A little more flexibility in dealing with indices tied mainly to Japanese government bonds will be needed in light of deepening negative yields," said Yasunobu Katsuki, a senior analyst at Mizuho Securities Co.
"Some may alter their stance and start measuring performance based on total returns rather than benchmarks." An official at the municipal personnel association declined to comment.
The fund changed its basic portfolio allocations last fiscal year in line with the changes made by the Government Pension Investment Fund, which now aims to take more risks to boost returns.
The municipal personnel association's basic asset proportions are 35 per cent in domestic bonds, 25 per cent in Japanese stocks, 15 per cent in foreign debt and 25 per cent in overseas equities.
It is allowed some fluctuations for each asset class. The fund aimed for more than 50 per cent in local debt before the latest targets were outlined in October 2015.
Regional government notes have higher yields than sovereign bonds. Yokohama City's 0.36 per cent debt due in 2026 yielded 0.001 per cent, for example, compared with minus 0.245 per cent for 10-year JGBs Tuesday.
Kyoto Prefecture's 0.07 per cent notes due in a decade yielded minus 0.01 per cent.
"For conservative or passive investment funds, assets with marginal risks and credit ratings nearly matching sovereigns will be the next target," said Nana Otsuki, the chief analyst at Monex Group Inc, a Tokyo-based online securities firm.
"Regional government bonds are the first candidate, followed by corporate debt with extremely solid credit quality. Yields on regional government debt remain elevated because they aren't subject to BOJ buying."
Active money managers for Japan's National Pension Fund Association were in April allowed to expand holdings of non-sovereign debt, buy inflation-linked securities and have larger deviations from their benchmarks, according to Satoshi Tamagaki, director at the fund's asset management department.
"It's the first experience and we had to do this to cope with low yields," Mr Tamagaki said.
"Even if there is a limit to negative rates, there is a question about whether we should stick to managing assets against a benchmark in light of the fiduciary responsibility issue. We need domestic bond investment for pension payments and can't reduce it, but it is challenging as yields falling below zero make future returns negative."