Japan’s Pension War: Abenomics Confronts GPIF

Japan’s Pension War: Abenomics Confronts GPIF
Bloomberg:  1 December 2015

It’s a mountain of money the size of Mexico’s economy. It could buy Apple and Exxon Mobil 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 wanted the bureaucrats who managed 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 accused them of favoring the stock market and their own approval ratings over pension security.

The Situation

GPIF is buying more local and foreign stocks as part of a year-long strategy revamp that was largely complete by October 2015. The next phase of its diversification will include emerging-market debt and junk bonds. Before the shift, half of the fund was invested in Japanese bonds, mainly government debt paying one of the lowest sovereign yields on the planet. The government has pushed the fund to broaden assets, hire proper investment professionals and use its might to impel 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 expected to erode 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 had to change. Global investors took note: The redirection of GPIF’s assets was expected to pump an estimated $181 billion into global markets. Early results of the shift in strategy underlined the greater risk: GPIF posted its biggest quarterly loss since at least 2008 amid a rout in global equities.  Fund officials said the $64 billion loss in the three months through September 2015 reflected “short-term market moves.”

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 with more aggressive strategies. It earned an average of 2.8 percent in the nine years through March 2013. That compared 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 $860 billion hoard, which is fed by the country’s oil riches and is the biggest sovereign wealth fund. The $2.8 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.

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. Takahiro Mitani, GPIF’s president, insisted before the strategy change 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 said. Lawmakers’ plans for GPIF are part of a broader drive to reshape Japan. With the return on equity of Japanese companies stuck below the global average, the government created a stewardship code to encourage the country’s hitherto silent institutions to press companies they own to improve. Tokyo’s stock exchange established a corporate governance code and introduced an index of companies that reward shareholders well, partly to guide GPIF on what to buy. The fund’s managers have been 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.