Abe hints at cutting pension benefits due to stock market downturn

Japan Press Weekly:  10 and 16 February 2016

Prime Minister Abe Shinzo has made clear his recognition that losses from investments of pension funds in stocks could bring about cuts in pension benefits provided by the government to pensioners.

This means that pension premium payers may pay for the loss of about eight trillion yen the Government Pension Investment Fund (GPIF) posted in its domestic/foreign stock holdings.

At a House of Representatives Budget Committee session held on February 15, Abe said, “Government payments of pension benefits will be naturally affected if the GPIF’s stock trading does not generate a profit as expected,” adding, “There is no option but to adjust pension benefits payments.”

The Abe administration in October 2014 drastically increased the volume of the GPIF’s “risk assets” as a growth strategy by asserting that it “will contribute to investments leading to growth”, and then allowed the world’s largest fund to use 87 trillion yen of its 130 trillion yen in assets for equity investments.

As a result, directly hit by the decrease in stock prices, the GPIF had a loss of 7.9 trillion yen in the July-September quarter of 2015. The strategy promoted by Abe to maintain high stock values turned out to be a huge failure.

The Abe regime must be held responsible for the expansion of risky investments. Even now, many pensioners have to live on an already small amount in pension benefits. It is unacceptable for the government to risk public pension reserve funds any further.

Risk of global market turmoil played into negative interest rate decision

Risk of global market turmoil played into negative interest rate decision
Nikkei Asian review: 29 January 2016

TOKYO -- The decision to adopt a negative interest rate was made "to prevent risks from China and emerging economies," BOJ Gov. Haruhiko Kuroda told reporters on Friday.

The Bank of Japan's move stunned market participants. It was "beyond a surprise," Mari Iwashita of SMBC Friend Securities said, "it was shocking."

Last month, Kuroda squelched speculation that the central bank might adopt a negative interest rate. "I do not think we should install one," he said in December. On Jan. 14, he denied the possibility of additional easing. 

 

However, China's slowdown and oil price woes have continued to stir markets. Before Friday's "shock," the Nikkei Stock Average in January had lost more than 3,000 points and the yen had strengthened to 115.97 at one point against the U.S. dollar.

The turmoil was "bizarre" enough for the BOJ to revise its core inflation forecast for fiscal 2016 down to 0.8% from the previous 1.4% -- and to change its mind about going negative. Last week, before leaving for meetings in Davos, Switzerland, Kuroda told BOJ staff to consider additional easing options.

By adopting a negative rate, the BOJ is aiming to boost "consumption and investment activities by pushing the yield curve down," Kuroda said.

Up to now, the BOJ's monetary policy under Kuroda had been to purchase assets at an annual pace of 80 trillion yen. But these purchases were seen "reaching the limits of their effectiveness," said Ryutaro Kono, chief economist at BNP Paribas Securities Japan.

Kuroda denied this was part of the decision, however. "It absolutely doesn't mean that asset purchasing has reached its limit," he said, stressing the policy has been effective in pushing up consumer prices.

The negative rate on deposits that banks keep with the BOJ is to start next month. Financial institutions will have to pay 0.1% interest on a portion of their deposits parked at the bank.

The aim is to encourage banks to take the money and invest or lend it.

 

The BOJ is hoping to dodge concerns brought on by going negative with a three-tiered structure; only one "tier" of financial institutions' deposits at the central bank will be subject to the negative rate.

     "Every easing policy has a short-term negative influence among financial industries," Kuroda said.
With a negative interest rate added to the BOJ's current quantitative and qualitative easing program, monetary policy is now "three dimensional," the governor said.

To achieve its price stability target of 2%, the BOJ "will examine risks to the economy and prices, and will not hesitate to take additional steps if needed," Kuroda said, signaling the possibility of the rate going deeper into negative territory or the BOJ expanding its asset-purchasing program.

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.

 

 

Japan's Pension Whale Stands by Stocks After $64 Billion Loss

Japan's Pension Whale Stands by Stocks After $64 Billion Loss
Bloomberg Business: 30 November 2015

Japan’s giant pension manager is unrepentant after a push into equities saw the fund post its worst quarterly result since at least 2008.

There’s no reason to doubt the 135.1 trillion yen ($1.1 trillion) Government Pension Investment Fund’s investment strategy, officials said on Monday in Tokyo as they unveiled a 7.9 trillion yen loss for the three months through September. The slump was GPIF’s first negative return after revamping allocations last October, when it doubled holdings of Japanese and foreign shares.

The loss will test the resolve of the fund’s stewards and of Prime Minister Shinzo Abe, who called for the shift out of bonds to riskier assets such as equities as the government tries to spur inflation. Sumitomo Mitsui Trust Bank Ltd. and Saison Asset Management Co. say that while the public may question the safety of their pension savings, GPIF should be judged on how it meets the retirement needs of the world’s oldest population over a longer horizon.

“They will see some criticism for this. But that’s more of an issue of financial literacy," said Ayako Sera, a market strategist at Sumitomo Mitsui Trust in Tokyo. “The liabilities of public pensions have an extremely long duration, so it’s best not to carve it up into three-month periods. However, from a long-term perspective, it’s necessary to continue monitoring whether the timing of last year’s allocation was good or not.”


The fund shifted the bulk of its holdings at a “terrible" time, just as stocks peaked, Sera said.
GPIF lost 5.6 percent last quarter as China’s yuan devaluation and concern about the potential impact if the Federal Reserve raises interest rates roiled global equity markets. That’s the biggest drop in comparable data starting from April 2008. The pension manager’s Japan equity investments slid 13 percent, the same retreat posted by the Topix index, and foreign stock holdings fell 11 percent. The fund lost 241 billion yen on overseas debt, while Japanese bonds handed it a 302 billion yen gain.
GPIF is likely to have purchased 400 billion yen of Japanese stocks and 1.7 trillion yen in foreign equities during the July-September quarter after its exposure to the asset class declined following the rout, according to Nomura Holdings Inc.

Equity Rebound

Things are looking up. The Topix rallied 14 percent since the start of the fourth quarter, while a gauge of global shares gained about 7.1 percent. As of Sept. 30, GPIF had 43 percent of its assets in equities around the world.

The asset manager “seriously considered" whether to continue with its current investment mix before deciding it’s the right approach, Hiroyuki Mitsuishi, a GPIF councilor, said on Monday. Short-term returns are more volatile these days, but there’s less risk that GPIF will fail on its long-term objective of covering pension payouts, he said. Fund executives have argued that holding more shares and foreign assets will lead to higher returns as Abe’s inflation push risks eroding the purchasing power of bonds.

“Short-term market moves lead to gains and losses, but over the 14 years since we started investing, the overall trend is upwards,” Mitsuishi said. “Don’t evaluate the results over the short term, as looking over the long term is important.”

Currency Loss

A stronger yen contributed to GPIF’s quarterly loss, with the currency gaining 2.2 percent against the U.S. dollar in the quarter.

GPIF has started to hedge some of its investments against fluctuations in the euro, which it sees declining in the short term on expectations for further central bank easing, the Wall Street Journal reported Tuesday. The fund is in a position to use hedges at any time, Mitsuishi said in response to the report, while declining to comment on whether it had.

GPIF hadn’t posted a quarterly loss since the three months through March 2014. The most recent results included returns from a portfolio of government bonds issued to finance a fiscal investment and loan program, with GPIF providing such figures since 2008. If those are stripped out, the drop was the fund’s third-worst on record, exceeded only by declines in the depths of the 2008 global financial crisis and the aftermath of the Sept. 11, 2001 terror attacks.

“They changed their portfolio knowing something like this could happen, and they’re not going to change their investment policy because of this,” said Tomohisa Fujiki, the head of interest-rate strategy for Japan at BNP Paribas SA in Tokyo. “They reduced domestic bonds and increased risk assets such as stocks, so temporary losses can’t be helped when there’s chaos in the market like in August and September."

Public Relations

For Tetsuo Seshimo, a fund manager at Saison Asset Management in Tokyo, GPIF gets a pass on its performance given it was in line with benchmark indexes, and a failing grade on its public-relations strategy.

“If you have half your portfolio in stocks, this kind of thing can easily happen," he said. “However, the public will probably be surprised. The issue is whether they have explained this properly -- they haven’t.”

GPIF knows it needs to convince the public that it’s doing the right thing. It unveiled a new YouTube channel on Monday, which will have videos of its press conferences.
“People are probably very interested in GPIF’s results,” said Mitsuishi. “We want to directly explain to them that a long-term view is important.”

http://www.bloomberg.com/news/articles/2015-11-30/japan-s-pension-whale-stands-by-stocks-after-64-billion-loss

 

Crash-Testing Abenomics

Crash-Testing Abenomics
ValueWalk: 14 January 2016

We remain convinced that Japanese risk assets—equities and real estate—are on track for a multi-year bull market. Our conviction is based on two essential pillars. The first one is our view that Japan’s private sector has begun to focus on capital efficiency as a principal driver of corporate strategic focus. The second one is that Japanese policy makers are relentlessly focused on ending deflation and creating a pro-growth domestic macro-economic backdrop. Both pillars remain firmly in place, and we expect a decisive and united policy response from “Team Abe” to the deflationary threat posed by current global and domestic developments. The Bank of Japan (BOJ) is back in play to ease on January 28/29.

While Japan’s corporate governance revolution is unlikely to be derailed by the current pullback in global markets, the current threat to Abenomics is very significant, in our view. Personally, I think Abenomics is now facing the most challenging “crash test” since its inception three years ago, because any national growth agenda is ultimately only as good as its success in building endogenous domestic forces strong enough to withstand a global deflationary shock.

Rising Deflation Risks

The current “crash test” consists of two major hurdles: economics and portfolio.
The economics is straightforward. It is the compounding deflationary pull from:

• Falling global demand in general, China in particular; • Imported deflation from both yen strength and falling commodity prices; and
  • Domestic demand deflation forced by the negative wealth effect from falling asset prices. Note here that on January 12 TOPIX was down 17.7% from its August 2015 peak, while the S&P 500 was down “only” 9.9% from its May 2015 peak.

While it is difficult to model the exact impact of these compounding deflationary forces on Japan’s inflation and growth outlook, sensitivity analysis suggests that the 5% appreciation of the yen and the fall in commodity prices alone have the power to push the Consumer Price Index (CPI) back into outright deflation (last reading of the national CPI was +0.3% year-over-year). It goes without saying that these are just the immediate first-round effects. Sustained global deflation momentum and yen appreciation would, before long, begin to cut into domestic employment and business investment plans. Clearly, downside risks to achieving any inflation target are rising.

Rising Portfolio Risks—Negative Returns for Abenomics Portfolio This Fiscal Year

  

The portfolio risks are even more significant, in my view. This is because the entire portfolio reallocation agenda of Abenomics—cut domestic bonds, raise domestic equities and non-yen exposure—is being undermined. Specifically, yen equities are now down 9.1% since the start of the Japanese fiscal year (April 1, 2015); in other words, we are on track for the first negative fiscal year for yen equities since 2011. It would also be the first year of yen appreciation since fiscal 2011. And to add insult to injury, the negative returns of risk assets is offset by a sharp rally in the perceived “risk-free” Japanese government bonds (JGBs), with 10-year yields falling from 40 basis points (bps) at the start of the fiscal year to 23 bps on January 12.

Asset Performance from a Japanese Perspective—Negative Abenomics Portfolio This Fiscal Year?



The message is loud and clear: Portfolio rebalancing has been a key part the Abenomics strategy, with the BOJ, the Government Pension Investment Fund (GPIF) and Japan Post all advocating and implementing significant increases in risk assets to “lead by example” and for private asset managers and retail investors to follow suit. If these new “national model portfolios” do indeed show negative returns in the current fiscal year—which concludes March 31, 2016—there are bound to be significant negative repercussions. After all, Team Abe has often insisted that the transmission of a new virtuous cycle from portfolio rebalancing into the real economy, fiscal sustainability, corporate innovation and positive wealth for consumers remains at the core of why Abenomics will work. Failure to perform risks incurring the wrath of critics from both the conservative side and the opposition.

Policy Response Coming—BOJ in Focus on January 28/29
In short, the current threat to Abenomics is very real, in our view. The good news is that Team Abe is not complacent. A strong and unified reflation policy response is likely to come soon. A key focus falls on the BOJ. We had originally expected added easing to come at the March 14 or the April 27 policy board meeting; but given the growing sense of urgency forced by the combination of accelerating global and domestic deflation risks and growing pressure on Team Abe to renew its pro-growth credentials, added BOJ stimulus is now in the cards for as early as the January 28/29 meeting. Indeed, assuming global and domestic asset price volatility remains high, failure to act decisively and proactively now could severely endanger Team Abe’s pro-growth credibility, in our view.

Important Risks Related to this Article

Investments focused in Japan increase the impact of events and developments associated with the region, which can adversely affect performance.