BoJ policy shrinks institutions’ assets, swells their liabilities

The Bank of Japan’s introduction of negative interest rates in January put a media spotlight on what the move means for the market values of life insurers’ and pension funds’ assets and shone the occasional shaft on their liabilities.

Sometime soon attention will most probably turn away from ‘the hunt for yield’ towards the effect on solvency ratios and pension benefit obligations (or PBO), the yardsticks used to measure these institutions’ ability to meet their obligations.

Such gauges are poorly suited to negative interest rate environments.

Assets – fixed income

Fixed income investments form an essential part of life insurers’ and pension funds’ portfolios. As this debt paper is issued for fixed terms the maturity dates of holdings can be matched to those of obligations becoming due to policy holders or pensioners.

In Japan, where the corporate bond market was moribund for many years, most of the paper available has been issued by government and thus has the additional advantage of offering absolute capital preservation as well as liquidity.

A low interest rate environment pushes up demand for this paper which, in turn, drives down the yield (a function of the price at which it was bought plus the rate on the coupon) and keeps the return on it in line with the market rates on other debt instruments.

However, while the market value of the fixed income paper held in portfolios theoretically rises, the huge buyback operations begun two years ago Bank of Japan so distort supply and demand interaction that there is nothing which is recognisably a ‘market’ and therefore no valid value-fixing mechanism.

The impact of this absence on institutional investors’ balance sheets makes it difficult to say whether their assets meet their liabilities and the bigger the exposure to bonds the bigger the distortion.

Assets – equities

Low interest rate theoretically push up prices for equities, allowing them to compensate for at least part of value lost on fixed income. But Japan’s stock market has been falling, possibly because has become so distorted by years of official intervention that it now responds only to government stimulus packages.

Either that or the implications of a shrinking population have become too clear for investors to ignore.

Even so, as the equities market still functions, its prices are remain a valid valuation tool.

Real assets such as direct investments in property or infrastructure facilities present different valuation problems as the markets in them are not so liquid.

Liabilities

The liabilities on an institution’s balance sheet are its obligations to insurance policy holders or pensioners and these stretch out for many years into the future. In order to measure the sufficiency of the assets held to meet them, these commitments must be calculated as single figures.

Japanese insurance companies’ solvency ratios are easier to compute today than in the time when they offered products with guaranteed returns but negative interest rates make the calculations more difficult.

Pension funds PBOs are arrived at by discounting future obligations to bring them to a ‘present value’.  The rate at which they are discounted is tied to the yield on various maturities of government bonds. The lower the discount rate goes the greater the obligations become.

Yet negative interest rates and government buybacks mean Japan now lacks a market deciding those yields and there must be a strong possibility that pension funds’ discount rate will have to be decided by government fiat if they are not to disproportionately impact sponsoring companies’ bottom lines.

Something like this has happened before and in Pensions in Crisis, published in 2003, what was then Watson Wyatt set out its impact on US pensions. It is well worth a read despite the different circumstances and it is here.

For those who do not recall the times:

“In the latter part of the Clinton presidency, the federal government began to buy back federal debt, especially long-term debt. This continued during the early days of the Bush administration and, in early 2002, the government stopped issuing 30-year Treasury bonds. The combination of the federal government buying back its 30-year bonds and suspending the series contributed to declining returns on these bonds, as their increasing scarcity drove their prices higher relative to other low-risk, long-term bonds. This development convinced many people that using the 30-year Treasury rate to value pension liabilities overestimates true liabilities. Because of concerns about potential pension funding requirements hurting the economy, policymakers increased the upper side of the interest rate corridor from 105 to 120 percent of the trailing average rate for 2002 and 2003. Despite these efforts, declining interest rates have been driving up funding requirements.”

© 2016 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes big commitments of money and time. This blog is one of the products of such commitment. It may nonetheless be reproduced or used as a source without charge so long as (but only so long as) the use is credited to www.ijapicap.com and a link provided to the original text on that site.

This blog would not exist without the help and humour of Diane Stormont, 1959-2012

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Policymakers seek to increase immigration by stealth

‘Desperately seeking an antidote to a rapidly ageing population, Japanese policymakers are exploring ways to bring in more foreign workers without calling it an “immigration policy”‘, according to a Reuters story published today.

© 2016 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes big commitments of money and time. This blog is one of the products of such commitment. It may nonetheless be reproduced or used as a source without charge so long as (but only so long as) the use is credited to www.ijapicap.com and a link provided to the original text on that site.

This blog would not exist without the help and humour of Diane Stormont, 1959-2012

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More (and more still) on life insurers’ future asset allocations

Post Insurance, the sector giant which did not feature in Reuters’ roundup of other Japanese life insurers’ asset allocation intentions for 2016/17 published yesterday (see below), is today the focus of a separate article headlined Japan Post Insurance to boost holdings of risk assets, minimise yen bonds.

At the same time, under the headline Japan insurers flock to foreign bonds as BOJ kills golden geese, the Nikkei carries its own ‘examination of the asset management plans of 10 life insurance firms — including Japan Post Insurance — and four non-life insurers [which] found that they intend to invest roughly 5.2 trillion yen in foreign bonds in the year through March 2017.’

It is worth bearing in mind that the extent of any “flocking” by Post Insurance (as distinct from sister institution Post Bank and parent Post Holdings with which it is frequently conflated) will need government permission, news of which has been strangely absent so far. It may amount to no more than the proceeds of maturing Japan Government Bonds (JGBs) being applied to other types of asset.

Some days earlier the Wall Street Journal Asia had reported that:

Nippon Life Insurance intends to invest 40 billion yen in infrastructure, including power plants, airports, and schools;

Dai-ichi Life Insurance wants to put 100 billion yen into aircraft financing over the next couple of years; and

Sumitomo Life Insurance will be directing an additional ¥100 billion in foreign-currency denominated loans and infrastructure.

More points to be kept in mind are:

Insurers have been asked questions on their asset allocation so many times in a short period that they may now have been reached the point where they begin to respond with what is embedded in the question being asked.

And of course, the value of the yen. If it looks like going below US$1=100 all bets are off.

Lastly, please recall that it was his blog which, on 3 February 2013 (see archive), carried the first argued case that Japanese institutional investors would begin sending a wall of money abroad — once the yen could be seen to be stably over US1=100.

The Post Insurance’s portfolio at 31 December 2015 can be seen under ‘The Giants’ tab at the top of this page. For the life insurance sector’s combined assets at the same date see archive (at right) 15 March 2015.

© 2016 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes big commitments of money and time. This blog is one of the products of such commitment. It may nonetheless be reproduced or used as a source without charge so long as (but only so long as) the use is credited to www.ijapicap.com and a link provided to the original text on that site.

This blog would not exist without the help and humour of Diane Stormont, 1959-2012

 

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Life insurers’ foreign bond holdings set for steady climb

Reuters life cos aa intebtionspoll April 2016Reuters’ just-published roundup of the asset allocation intentions of Japan’s biggest life insurers in the financial year which began on 1 April is reproduced below while the intriguing  assumptions the  plans are based on appear at the left.

Life cos have combined assets of roughly 200 trillion yen ($1.80 trillion) under management and are, Reuters notes, ‘planning to keep increasing their foreign bond holdings in the fiscal year’ .

The findings are consistent with ijapicap’s earlier coverage which has stressed that any shifts in the firms’ portfolios are likely to come about only as their holdings of Japan Government bonds (JGBs) mature and the funds then redeemed are applied to other asset categories.

The summary results are based on news conferences and interviews with Reuters during April.

Note that not all firms provided information about investment intentions in all categories and that this is the first time respondents have been asked about their intentions for the whole financial year as past polls have covered only the coming six months.

Japan bonds                                                                                                                          Asahi Mutual Life Insurance ~ holdings to decrease, mostly through maturing bonds. Daido Life Insurance ~ to maintain holdings after selling Y30bn in last financial year. Dai-ichi Life Insurance ~ to reduce JGBs holding, increase credit products and  infrastructure finance.                                                                                                                  Fukoku Mutual Life Insurance ~to stop investing in 10-year JGBs, may invest in super long bonds.                                                                                                                                       Meiji Yasuda Life Insurance  ~ to keep holdings flat, no plan to buy government bonds at current yield levels.                                                                                                                        Mitsui Life Insurance ~ to decrease holdings by about Y100bn.                                                Nippon Life Insurance ~ to decrease holdings, keep fresh JGB investment to a minimum.                                                                                                                                        Sumitomo Life Insurance ~ to slightly decrease holdings.                                                    Taiyo Life Insurance ~ to refrain from fresh investment.

Foreign bonds                                                                                                                        Asahi ~ to increase foreign bond holdings by Y50bn yen vs Y200 bn increase last financial year.                                                                                                                                                         Daido ~ to further increase holdings after buying Y180bn last financial year.               Fukoku ~ to increase foreign bonds investment by Y30bn vs Y550bn increase last financial year.                                                                                                                                                        Dai-ichi ~ to increase FX-hedged bonds holding, to buy unhedged bonds if yen rises.          Meiji Yasuda ~ to increase holdings of both FX-hedged and unhedged bonds by Y200bn each.                                                                                                                                                  Mitsui ~ to increase holdings of FX-hedged and unhedged bonds by about Y100 bn each. Nippon ~ to raise holdings, diversifinancial year from US Treasuries to credit products/European bonds.                                                                                                           Sumitomo ~ to increase FX-hedged, unhedged foreign bond holdings, to buy from more countries.                                                                                                                                          Taiyo to invest in corporate bonds, slightly increase investment in FX-hedged bonds.

Japan stocks                                                                                                                          Asahi  ~ to keep holdings steady.                                                                                                 Daido ~ to maintain holdings or increase,depending on market; increased Y65bn last financial year.                                                                                                                                    Dai-ichi ~ to control holdings flexibly depending on market levels.                                        Fukoku ~ to invest Y15bn in equities with high dividend yields this financial year.                 Meiji Yasuda ~ to keep holdings steady.                                                                                  Mitsui ~ to keep holdings steady.                                                                                                      Nippon ~ to modestly increase holdings, with a renewed focus on shareholder returns/growth.                                                                                                                         Sumitomo ~ to keep holdings steady.                                                                                            Taiyo ~ to invest in high dividend yield stocks this financial year.

Foreign shares and alternatives                                                                                            Asahi ~ to keep foreign stock holdings steady, to increase investment in “middle risk” assets like subordinated debt.                                                                                                     Daido ~ to maintain or increase foreign stocks; increased Y10bn last financial year.     Dai-ichi ~ to increase foreign stocks; alternatives, properties portfolio to be flat.            Fukoku ~ to invest Y50bn in foreign stocks.                                                                             Meiji Yasuda ~ to increase investment in foreign shares, cut real estate Sumitomo to maintain foreign stocks holdings steady.                                                                                  Mitsui ~ to keep real estate investment flat.                                                                          Nippon Life ~ to buy foreign stocks with high growth potential.                                          Taiyo ~ to maintain alternatives flat.

© 2016 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes big commitments of money and time. This blog is one of the products of such commitment. It may nonetheless be reproduced or used as a source without charge so long as (but only so long as) the use is credited to www.ijapicap.com and a link provided to the original text on that site.

This blog would not exist without the help and humour of Diane Stormont, 1959-2012

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GPIF president Norihiro Takahashi hedges his bets on hedging

‘Japan’s Government Pension Investment Fund, having taken few safeguards against foreign exchange risk, is adopting currency hedging to contend with an appreciating yen, President Norihiro Takahashi told the Nikkei on Monday’ as that newspaper reported under the headline ‘GPIF to embrace currency hedging’.

On Tuesday Mr Takahashi was underlining to Reuters and the Financial Times that any hedging would be solely to protect the Fund from foreign exchange market volatility.

The Nikkei’s report raised the question of whether GPIF intended show the way to other pension funds which have historically had an ambivalent attitude to hedging — or to paying for it at least.

Also, since the Fund’s unhedged move into overseas investment helped drive down the value of the yen and thus provide some early successes for Abenomics, the apparently new approach raised doubts about the Fund’s support for that policy. These now seem to have been dispelled.

Listening mode

The Financial Times article ends with Mr Takahashi telling authors Robert Harding and Leo Lewis:

‘“We are a long-term investor, so above all else we want ideas for long-term returns, or information that takes the long view about economic changes such as trade patterns or geopolitical risk.

“I’m happy to talk with many bankers and institutional investors who have advice on what will happen over the long-run and what it will mean.”

This fits well with the message in the 31 March posting headlined Maturities of JGB holdings key to institutions’ asset allocations (see archive) which noted that while the structure of portfolios is unlikely to change in the current year:

“In all three sectors [banks, insurance companies and pension funds]  those looking to sign up suppliers in the next 18 months appear to be in listening mode for propositions that can be clearly shown to meet their needs and explained to their regulators. They are today less slavishly tied to following their sector’s consensus though some considerations will be sector-wide.”

© 2016 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes big commitments of money and time. This blog is one of the products of such commitment. It may nonetheless be reproduced or used as a source without charge so long as (but only so long as) the use is credited to www.ijapicap.com and a link provided to the original text on that site.

This blog would not exist without the help and humour of Diane Stormont, 1959-2012

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Japan’s stock market increasingly held by state agencies

In a brilliant piece of delving+deduction Bloomberg shows how the Bank of Japan’s buying of ETFs as part of its quantitative easing programme is putting it among the country’s largest shareholders.

‘At an estimated 8.6 trillion yen as of March, the BOJ’s holdings amount to about 1.6 percent of the total capitalization of all companies listed in Japan. That compares with about 5 percent held by the nation’s Government Pension Investment Fund. The central bank’s use of large-cap ETFs means its positions are concentrated, with less impact on the thousands of Japanese companies outside benchmark indexes.’

The article goes on to note that ‘The central bank effectively controls about 9 percent of Fast Retailing Co, the operator of Uniqlo stores, and nearly 5 percent of soy sauce maker Kikkoman Corp. It has an estimated shareholder rank of No. 3 in both Yamaha Corp, one of the world’s largest makers of musical instruments, and Daiwa House Industry Co, Japan’s biggest homebuilder.

Further, ‘If the BOJ accelerates its ETF purchases this week to an annual rate of 7 trillion yen — the pace predicted by Goldman Sachs Group Inc — the central bank could become the No. 1 shareholder in about 40 of the Nikkei 225’s companies by the end of 2017, according to Bloomberg calculations that assume other major stakeholders keep their positions unchanged. It could hold the top ranking in about 90 firms using HSBC Holdings Plc’s estimate of 13 trillion yen.’

While the buying is intended to further the quantitative easing that forms part of Abenomics it could also undermine the promotion of better shareholder stewardship  practices which form part of that policy.

‘With such large stakes sitting in index-tracking ETFs that lack a mandate to scrutinize company performance, the BOJ’s intervention could also hamper attempts to improve Japan’s corporate governance’, say Yuji Nakamura, Anna Kitanaka and Nao Sano, the authors of the Bloomberg piece.

It sometimes seems that the Japanese Government is unable to get out and stay of financial markets. While the days of ordering trust banks and life insurers to prop up whatever it deemed to need support seem to have ended a decade or more ago the Government Pension Investment Fund has to some extent taken on the same role.

And even as banks, pension funds and life insurers are bring urged to sell their Japan Government Bonds to the central bank, the state has still not announced permission for Post Bank and Post Insurance  – the giants of their sectors and majority government owned – or the civil service ‘mutual aid’ pension schemes to shift their asset allocations away from JGBs.

The Bloomberg team rightly notes that intervention by state agencies in other jurisdictions  ‘… has worked out well …  The U.S. government spent $245 billion to prop up banks during the global financial crisis in 2008, earning a profit of about $30 billion on their investments as the industry recovered. At the height of the Asian Financial Crisis in August 1998, Hong Kong bought HK$118 billion ($15.2 billion) of local shares to defend its currency peg, helping to fuel a rally that allowed it to dispose of the entire stake within five years.’

The problem for the BoJ will be when the time comes to sell as a market which has come to see state intervention as its saviour in tough times will no doubt lobby against it — whether the circumstances of the time are straitened or not.

© 2016 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes big commitments of money and time. This blog is one of the products of such commitment. It may nonetheless be reproduced or used as a source without charge so long as (but only so long as) the use is credited to www.ijapicap.com and a link provided to the original text on that site.

This blog would not exist without the help and humour of Diane Stormont, 1959-2012

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GPIF appoints State Street Trust as alternatives custodian

According to an announcement from the Government Pension Investment Fund, State Street Trust and Banking Co Ltd has been appointed ‘a’ custodian for its investments in alternative assets.

Recent data from the Fund show that in the year ending 31 March 2015 it paid State Street Trust and Banking 711.1 million yen in fees for international bond custody services.

At the same time GPIF’s other custodians were Trust & Custody Services Bank for domestic bonds and short-term assets, Japan Trustee Services Bank for domestic equities and The Master Trust Bank of Japan for international equities.

So it looks as though, for the moment at least, State Street Trust and Banking may be ‘the’ custodian for alternatives.

© 2016 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes big commitments of money and time. This blog is one of the products of such commitment. It may nonetheless be reproduced or used as a source without charge so long as (but only so long as) the use is credited to www.ijapicap.com and a link provided to the original text on that site.

This blog would not exist without the help and humour of Diane Stormont, 1959-2012

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Feint signals that sokanji may be looking at a different future

Meiji Yasuda Life Insurance has stopped accepting money from new corporate clients for [their] defined-benefit pension funds as the Bank of Japan’s negative interest rates hinder money management focused on long-term Japanese government bonds’, according to the Nikkei.

If correct, this would indicate that corporate pension funds with all or part of their money held in pooled accounts at life insurers, who also act as their domestic custodians, have been seeking to move their funds from one institution to another.

Such a move would be revolutionary as the 1960s legislation which set the structure for company retirement schemes demands that each has a life co or trust bank as a sokanji (organiser).

This is the one area of pensions management which has never been deregulated and the understanding has been that a sokanji is appointed in perpetuity. They are never — or have not to date been – changed.

The business has been in decline as the old Employee Pension Funds – which also managed contributions to government’s employee pension insurance (the daiko) – have been closed and not all have been replaced by the newer types of DB fund.

At 31 March 2015 Meiji Yasuda Life was the sixth largest sokanji overall with 905 clients for whom it supervised 2,926.2 billion yen. The largest life co in the business, Nippon Life, has 2,982 customers with 59,311bn yen.

© 2016 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes big commitments of money and time. This blog is one of the products of such commitment. It may nonetheless be reproduced or used as a source without charge so long as (but only so long as) the use is credited to www.ijapicap.com and a link provided to the original text on that site.

This blog would not exist without the help and humour of Diane Stormont, 1959-2012

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Prudential Investment Management bigs up its future in Japan

‘Prudential’s money chief sees trillions of yen in asset growth’ according to a recent Bloomberg story which quotes ‘David Hunt, the chief executive officer of PGIM, the new name for Prudential’s asset management business’ as wanting to continue boosting the firm’s now 18.2 trillion yen of Japanese assets under management by 10-20% a year.

Hmmm.  According to the most recent membership lists of the Japan Investment Advisors Association (JIAA) and the Investment Trusts Association (ITA) and the firm’s own web site the name of Prudential’s Japanese arm continues to be  Prudential Investment Management Japan Co Ltd.

Figures from the JIAA and the ITA show that at the close of the financial year on 31 March 2015 Prudential Investment Management Japan had 462.9 billion yen in Japanese pensions assets under its stewardship and 20.2bn yen in holdings at its Japanese investment trusts.

This is less than 1tr yen so presumably the remaining 17tr+ yen is managed in Japanese markets for institutions from abroad.

Similarly, the amounts managed for Japanese pension funds and investment trust clients  have not been growing at 10-20% a year in recent times. Prudential enjoyed a huge jump in its pensions’ business in 2012 (from 15.7bn yen to 435.5bn yen) when it took over two former AIG units (AIG Star Life Insurance and AIG Edison Life Insurance Company) but since then growth has been around 3% a year. In investment trusts it is still well below its record of 98.39bn yen it enjoyed in 2002.

© 2016 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes big commitments of money and time. This blog is one of the products of such commitment. It may nonetheless be reproduced or used as a source without charge so long as (but only so long as) the use is credited to www.ijapicap.com and a link provided to the original text on that site.

This blog would not exist without the help and humour of Diane Stormont, 1959-2012

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A.M.Best sees little likelihood of life cos dumping JGBs soon

More expert commentary, this time from insurance ratings firm A.M.Best, gives the lie to the popular line in the generalist press that life insurers are dumping their holdings of Japan Government Bonds in favour of foreign equities and higher yielding alternatives (see also 11 April posting below More of Institutional asset allocation picture moves into view‘).

A Best report entitled How Have Japanese Life Insurers Coped with       Ultra-Low Interest Rates Over Two Decades? notes that:

‘Although foreign securities and alternative investments have become more attractive to life insurers due to higher yields, a shift away from Japanese government bonds would not be material in the near term due to the current regulatory environment.

‘A.M. Best believes that the near-term impact on earnings and capitalization of life insurers from the recent introduction of negative interest rates would be limited as relatively long-term asset duration implies that reinvestment at lower yields will take time to impact earnings and capitalization. In addition, the companies have proactively controlled the sales volume of interest rate-sensitive products to mitigate the widening negative interest spread.’

© 2016 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes big commitments of money and time. This blog is one of the products of such commitment. It may nonetheless be reproduced or used as a source without charge so long as (but only so long as) the use is credited to www.ijapicap.com and a link provided to the original text on that site.

This blog would not exist without the help and humour of Diane Stormont, 1959-2012

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