Biggest pension fund has reasons to buy Japan stocks, sell bonds

Tokyo

THE world's biggest pension fund has two good reasons to extend its switch from bonds into stocks: sovereign debt with negative yields and a plunge in equities that cut valuations to a three-year low.

Credit Agricole SA says the Bank of Japan's decision last month to adopt rates below zero on some reserves will force the US$1.2 trillion Government Pension Investment Fund to lower its domestic bond holdings to as little as 25 per cent of its portfolio, 10 percentage points lower than its current target. GPIF would have to buy 6.2 trillion yen (S$76 billion) of domestic stocks just to achieve its allocation target of 25 per cent, according to Bank of America Corp.

"As yields from JGBs turn negative, GPIF is going to have to question whether it can keep things as they are," said Kazuhiko Ogata, a Tokyo-based economist at Credit Agricole. "They'll probably head towards lowering their bond holdings and become more aggressive in buying stocks and foreign securities."

At stake is about 50 trillion yen in Japanese government bond holdings of GPIF, which is facing political pressure to raise returns in one of the fastest-ageing nations in the world. The retirement fund suffered its worst returns since 2008 due to an equity rout in the quarter ended September. Prime Minister Shinzo Abe says that the fund's performance isn't directly tied to the Nikkei 225 Stock Average, responding to criticism that GPIF is losing public money by investing in shares.

Central bank governor Haruhiko Kuroda adopted negative interest rates last month in a bid to spur spending and inflation. The Topix index rally that ensued lasted all of two days before the gauge continued to extend this year's plunge amid an equity rout which has seen more than US$7 trillion wiped from global markets since the start of 2016. The yield on 10-year JGBs plunged to a record minus 0.035 per cent last week.

The Topix has dropped 7.8 per cent since end-September, while the Bloomberg Japan Sovereign Bond Index has gained 2.4 per cent. The equity gauge is traded at 12 times estimated earnings on Feb 12, near its cheapest since September 2012.

The Topix swung between gains and losses on Tuesday to trade at 1,301.44 at 10.39 am in Tokyo, after surging 8 per cent on Monday.

"In an environment like this where equities are cheap and bond prices are high, GPIF would probably be selling debt and buying stocks anyway," said Bank of America Merrill Lynch's chief Japan rates strategist Shuichi Ohsaki. "And now that the BOJ is adopting negative interest rates, GPIF is likely to reduce domestic bonds and provide support for Japanese stocks" by buying them.

According to his estimates, GPIF probably held 42 per cent of its portfolio in domestic bonds, 19 per cent in Japanese stocks, 14 per cent in foreign debt and 20 per cent in overseas equities as at Feb 12. That indicates the fund needs to sell 11.7 trillion yen of JGBs to hit its 35 per cent target for the asset, he said. His calculations are based on recent market moves and assumes GPIF hasn't shifted holdings since reporting end-September figures.

GPIF isn't the only major investor in the country being hit by the BOJ's negative rate policy. Japan Post Bank Co said on Monday it will halt plans to launch a Japan and US sovereign bond fund because of the BOJ's decision. The firm, also one of the biggest holders of JGBs and one that gets more than 90 per cent of its profit from interest income, will be among the most hurt of the major banks from the falling rates, according to Shinichiro Nakamura, a Tokyo-based senior analyst at SMBC Nikko Securities. BLOOMBERG