A surge into stocks by Japan’s public pension fund

Japan’s Government Investment Pension Fund, the world’s largest pool of publicly managed pension assets, is poised to make a change to its investment strategy that has equity markets salivating. Indications are that a review of its allocation guidelines, expected to be wrapped up next month, will raise the percentage of the fund’s roughly Y127tn ($1.3tn) portfolio that is dedicated to Japanese stocks, while reducing holdings of Japanese bonds.

The GPIF’s current guidelines are risk-averse by global standards, with the majority of the model portfolio dedicated to low-yielding Japanese public debt and just 12 per cent given over to domestic equities. Under the new guidelines, the equity level looks likely to rise to 20 per cent – a change that could send trillions of yen flowing into the Topix, the Nikkei and other Japanese share indices. And as of this week, key investment decisions will be made by the fund’s investment board, rather than Takahiro Mitani, its president.

So, how big is the GPIF, really?

Big. As in, bigger than the next two largest national pension funds combined:

And more than twice the size of the Swiss economy:

And how much money would actually flow into Japanese shares?

A lot – though not as much as the guideline change suggests at first glance. The 12 per cent figure is a median target but the actual figure can move up or down depending on how the fund’s investments perform. Last year the Japanese market’s 50-odd per cent surge boosted the value of the GPIF’s holdings enormously, so that by the end of March domestic shares actually accounted for 16.47 per cent of the portfolio.

Even so, that still leaves the fund about 3.5 percentage points short of the mooted new target, a ratio that translates to Y4.5tn of its holdings. That is the amount it would theoretically have to shift into equities to get to 20 per cent, other things being equal (ie if the market stayed flat). If the new guidelines were also applied to a group of smaller affiliated funds, as many think they would be, the amount would top Y5tn.

So, is this going to kick off another bull run in Japanese stocks?

Best not to get carried away. Japan is a big market, and as Capital Economics points out, even a 5 percentage point increase in the GPIF’s domestic stockholdings would be equivalent to a modest 1.4 per cent of the value of listed equities in the country. And an important but still unanswered question is how quickly the fund would make the switch – Y5tn into the market over a year would have a bigger impact than the same amount over, say, three to five years. It’s hard to imagine the GPIF transforming itself into an active, risk-taking investor overnight: the fund has fewer than 80 employees, for starters, compared with the 1,000 or so who run the Canada Pension Plan.

A further question is whether other asset managers would follow the GPIF’s lead. Together, all of Japan’s public and semi-public pension funds hold about Y200tn in assets, while a further Y100tn is in private corporate pensions, according to UBS. The Japan Post insurance scheme has another Y90tn, and then there are the private insurance companies, the mutual funds … ad infinitum. If the GPIF starts a trend, the results could be dramatic, but no other institution is talking openly about following it yet. As UBS says, “we believe expectations may have gotten a little bit ahead of themselves”.