Japan Post Bank Co seen as the next whale big enough to move markets

Tokyo

AS the world's biggest pension fund nears the end of its switch from sovereign bonds into stocks, investors are looking at Japan Post Bank Co as the next actor big enough to move markets.

The postal lender, the biggest holder of Japanese government bonds (JGBs) after the central bank, sold 5.1 trillion yen (S$60.3 billion) in JGBs in the three months ended June, after offloading a record amount of the debt last fiscal year. The US$1.2 trillion Government Pension Investment Fund (GPIF), known as the whale, said last week that stock and fixed-income holdings were all within three percentage points of their targets, suggesting that it has almost completed a planned shift into riskier assets including global bonds and shares.

The Bank of Japan (BOJ) needs to find about 45 trillion yen in JGBs from the market to meet its annual goal for boosting money supply to stimulate the economy. Japan Post Bank, with 49.2 per cent of its 206.5 trillion yen held in domestic debt, fits the profile and needs to seek higher profits ahead of a possible public share sale this year.

"It wouldn't be a surprise to see Japan Post Bank do to their portfolio what GPIF did to theirs," said Yoshinori Shigemi, a global market strategist in Tokyo at JPMorgan Asset Management. "It's important for both investors and the government that the bank enhance its corporate value and show that profits are going to grow by aggressively reshaping its portfolio ahead of its listing."

Japan Post Bank has been diversifying its investments and will continue to do so while taking into consideration the situation in financial markets as well as asset and liability management, said Satoshi Yamada, a spokesman for the bank. "We have made efforts to secure stable earnings as well as diversify our profit source," Mr Yamada said. "From a risk diversification viewpoint, we have proceeded to diversify assets while appropriately controlling risk."

Like GPIF, Japan Post Bank has been reducing its dependency on domestic government bonds. The bank owned 101.6 trillion yen in sovereign debt at the end of June, with the ratio falling below 50 per cent of holdings for the first time.

Unlike GPIF, however, Japan Post Bank has not been increasing domestic stocks. It held just 900 million yen of local equities at the end of the first quarter, unchanged from March.

"Among the whales that the market has been focused on, the GPIF has had the biggest impact," said Hidenori Suezawa, an analyst at SMBC Nikko Securities Inc in Tokyo. "Others have massive assets, but it may take some time for them to match GPIF."

The pension fund reduced domestic bond holdings to 38 per cent of its assets at the end of June, down from about 50 per cent a year earlier. The fund had 23 per cent in Japanese stocks, up from 17 per cent, while international debt made up 13 per cent, and 22 per cent was in equities abroad in June. It targets 35 per cent in JGBs, 25 per cent each in domestic and foreign shares, and 15 per cent in overseas notes.

"GPIF sold massive amounts of Japanese debt, and the BOJ absorbed it very quickly," said Shuichi Ohsaki, a rates strategist at Bank of America Corp's Merrill Lynch unit in Tokyo. "So now that GPIF's selling has finished, the focus will be on who else is going to sell. Unless Japan Post Bank sells JGBs, the BOJ won't be able to continue its monetary stimulus operations. It has to sell."

Japan's 10-year government bonds yielded 0.395 per cent on Wednesday, down from about 0.5 per cent a year earlier. The Topix index of the country's shares has risen 13 per cent in the past year, even after a global equity rout sparked a sell-off that pushed the measure into a correction.

Japan Post Bank saw returns from investments fall 6.3 per cent in the three months ended June from a year ago. GPIF earned 19 per cent more in the same period as stocks rose and the yen weakened, boosting overseas assets.

The postal bank said in April that it plans to increase investments in assets aside from JGBs, such as foreign securities and corporate bonds, by 30 per cent to 60 trillion yen in the fiscal year ending March 2018.

"Japan Post Bank needs to do something to make itself look attractive with its listing coming up," said Nicholas Smith, a strategist at CLSA Ltd in Tokyo. "The company's going to be a lot more valuable if it's able to get some decent returns. And with the market on its back at the moment, it seems a very good time to be doing that." BLOOMBERG