Japan has no plans to overhaul pension funds' asset allocation, sources say

TOKYO — Japan has no immediate plans to change target asset allocations of its state pension funds but could work within existing allowable ranges to direct more investment to domestic assets, people with knowledge of government deliberations told Reuters.

Finance Minister Satsuki Katayama said on Friday the government would seek ways to encourage pension funds, including the Government Pension Investment Fund's (GPIF), to make "substantially greater investments in Japanese financial assets".

The remark sparked gains in the yen and bonds as investors bet billions of dollars could be channelled into Japanese markets through GPIF, the world's largest pension fund, which manages 293.6 trillion yen (S$2.3 trillion) in assets as of March.

While the government is exploring ways to boost such investments within the existing allowable ranges of the benchmark portfolio, the initiative won't lead to immediate revisions to GPIF's medium-term objectives, two government sources said.

"Markets reacted much more than we expected," the first source said, while acknowledging that Katayama's remarks were not intended to imply a change in the asset allocation. The sources spoke on condition of anonymity due to the sensitivity of the matters.

Katayama's comments came after a draft of the government's economic blueprint triggered a sell-off in yen and bonds by giving markets the impression dovish premier Sanae Takaichi's administration would pressure the central bank to delay rate hikes. 

A minister in charge of the blueprint was later forced to admit the government will tweak language to soothe market jitters.

GPIF is mandated to invest solely in the interests of pension beneficiaries and cannot deploy its assets to advance government policy goals.

Under its current medium-term management plan, GPIF allocates 25 per cent each to domestic bonds, foreign bonds, domestic equities and foreign equities. For domestic bonds, it allows a six percentage point deviation range around its target allocation.

The first source did not rule out the possibility of directing more of GPIF's funds into domestic bonds within that allowable range.

But he stressed that investment decisions of the pension funds needed to be cautious and that even shifts within the permitted deviation band required convincing justifications.

"Even if it doesn't lead to a review of its basic portfolio, it's possible for GPIF to increase domestic investment within the scope of existing discretion," said Takahide Kiuchi, executive economist at Nomura Research Institute, adding the government could nudge GPIF to make such increases.

"Given the rise in long-term interest rates, Japanese government bonds have become relatively attractive safe assets offering higher returns," he said.

Oversight of the fund rests with the Ministry of Health, Labour and Welfare. The ministry declined to comment when asked whether the government is considering changes to GPIF's asset allocation.

"GPIF reviews the policy portfolio annually, managing risk in light of market developments and assessing whether the investment environment assumed when the portfolio was established has changed materially," said Chief Cabinet Secretary Minoru Kihara.

"My understanding is that the portfolio will be revised if such changes make adjustments necessary," he told a news briefing on Monday.

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