GPIF shake-up could encourage foreign debt spree

06 June 2014   Category: News, Asia, Global, Japan   By Daniel Shane

Plans by Japan’s giant Government Pension Investment Fund (GPIF) to invest up to US$100 billion in overseas debt, as part of a major shake-up of how the fund allocates its investments, could also encourage sharpened risk appetite among other pension fund managers in the country.

The GPIF, one of the world’s largest investors with AUM of $1.27 trillion, is widely expected to this month announce far-reaching reforms that will see it diversify the focus of its portfolio away from domestic bonds toward higher-yielding asset classes, including foreign debt.

A poll of fund managers by Bloomberg in May forecast that the GPIF’s target allocation for foreign debt could fall to 40% from its actual weighting of 55% at the end of last year. This would equate to the GPIF selling off as much as $190 billion in Japanese government securities.

A report published by HSBC Global Research said that the impact on government bonds would likely be offset by the Bank of Japan’s asset purchase programme, but that an increase of its allocation to foreign bonds to 19% would have serious ramifications on overseas debt markets.

The research noted that the country’s other pension funds were likely to follow moves by the GPIF in increasing weightings toward higher yielding debt.

“It is also worth noting that such a shift in investment policy may not only be confined to GPIF and may increasingly be adopted by other public and private pension funds,” the HSBC report read.

A significant increase in allocations to foreign debt would also weaken the Japanese yen versus the greenback, HSBC said, which could aid Prime Minister Shinzo Abe’s goal of bolstering inflation in the country to 2%.

“The impact and flows into international bond markets is likely be greater than on JGBs in response to any changes in GPIF’s portfolio and could eventually lead to a re-weakening bias of the Japanese yen,” the report continued.

It added that this could be viewed as “the fourth policy” arrow from Mr. Abe. His first three arrows, which constitute the ‘Abenomics’ economic policy he has pursued since returning to office in December 2012, are massive fiscal stimulus, aggressive monetary easing, and structural reforms aimed at boosting Japan’s competitiveness.

Mr. Abe has been pushing the GPIF to become more adventurous with its investing, including shaking up and expanding the fund’s investment committee, which could be given new beefed-up powers to allocate more to higher-yielding assets.

About 60% of the retirement savings manager’s assets are currently held in domestic government debt, which includes some of the lowest yielding sovereign bonds on the planet.