Mutual funds’ sterling-denominated holdings up almost 60%

What was that about two rainy, tea-drinking, monarchies on islands near continents they have historically feared but from where much of their culture comes?

Investment trusts'foreign assets by country 2013-14Mrs Watanabe has discovered the other one.

At 1,034.4 billion yen on 31 March, retail mutual funds’ holdings of sterling-denominated securities were almost 58% up on the level at the close of the previous financial year, an analysis of figures from the Investment Trusts Association shows.

Holdings in other major foreign currencies did not rise at anything like this pace — even when the 21% of the lift attributable to the rise in the value of sterling against the yen the during the term is discounted.

Meanwhile holdings in the poor old euro are down by 97.2% compared with a total foreign investments decline of 8.3% in yen terms.

Bonds accounted for the largest share of British investments at 58.8% while 21.6% was in stocks and 17.9% in ‘investment securities’, not further defined, and the rest in ‘other’.

US investment were distributed 35.1% to bonds, 15.0% to stocks, 42.3% to investment securities while bonds took up a hefty 82.2% of Canadian investments.Investment trusts' foreign investments 2003-2014

The full figures can be seen here.

© 2014 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes commitment, 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

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


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Few surprises in year-end investment trust market shares

When Morning Star revealed earlier this month that FIL Investments’ US High Yield Fund had overtaken Kokusai Asset Management’s Global Sovereign Open as the biggest retail bond offering by assets in Japan, the move was widely reported.

Yet an analysis of figures which the country’s firms file with its Investment Trusts Association shows that at the financial year end on 31 March the development had failed to make much of a dent in either firm’s market share. Indeed, the real spurt for FIL (the name under which as Fidelity operates in Japan) came the year earlier when it leapt from eleventh to seventh place.

ITA top 30 by makret share 2014-3-31Similarly Sumitomo Mitsui Trust Asset Management’s four-place rise from twelfth to eighth this time was far less than the seven-place jump it saw the year before.  (This firm is unrelated to Sumitomo Mitsui Asset Management which came in tenth in market-share terms. )

Nomura, Daiwa and Nikko continue to dominate the field with a combined share of 48.33%. In yen terms Nomura was well ahead with 18,337.0 billion followed by Daiwa with 12,023.4bn and Nikko with 8,371.6bn.

Judged by growth, Capital International, Manulife Asset Management, Rheos Capital Works, Clover Asset Management, Kamakura Investment Management, Chugin Asset Management and Simplex Asset Management all put on more than 100%, though from low bases, in a year when the overall market grew by 10.3%.

For tables showing the top 20 firms  by value and by percentage growth see the ‘Japan: Fund managers’ area under the ‘Rankings’ tab at the top of this page.

Aberdeen Investment Management, ITC Investment Partners Corporation, Plaza Asset Management, YMR Fund Services and FuNNex Asset Management appear to have left the field. So too has Toyota Asset Management which has been acquired by Sumitomo Mitsui Asset Management.

2014 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes commitment, 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

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

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Government Pension Investment Fund’s new investment panel

The Ministry of Health, Labour & Welfare has put in place a new investment committee at the Government Pension Investment Fund, right after the start of a financial year which could see a reinvigorated approach to the allocation of GPIF’s portfolio.

The appointments are for two years and include Nomura Research Institute’s Sadayuki Horie who is well known to the fund management community for his annual reports on the industry which have won wide respect.  He is the only member with hands-on experience of investment markets.

However,  Yasuhiro Yonezawa, who rejoins the committee after chairing it from 2008 to 2010, is an experienced commentator and the author of several academic papers on  aspects of stock market behaviour. The Nikkei newspaper believes that the other members of the group will elect him as its chariman.

The selection of Setsuya Sato may suggest an attempt by the Fund to improve its external communications. For this to work, though, the MoHLW’s pensions bureau, and the whole Ministry itself, will need to be weaned off its practice of declaring even minor matters to be secret, then leaking the information to a journalist whose specialism is not pensions, thus ensuring muddle.

It is not clear whether Isao Sugaya, is from Rengo proper [the Japan Trades Union Confederation] or from the Rengo-Rials, the Research Institute  for Advancement of Living Standards, thus replacing Takashige Komoda. One of   Rengo-Rials’ sponsors is the MoHLW.  Representing Rengo, with its need to constantly consult the wishes of the multi-member organisation, would be such a tough call it could reduce the incumbent to the status of observer.

Organisations not represented are the Japanese Society of Certified Pensions  Actuaries and the Institute of Actuaries of Japan – significant omissions for an entity which reveals a considerable amount about its portfolio of assets, and is the recipient of all manner of advice about them, but barely mentions the characteristics of the liabilities it, and they, exist to meet.

Incoming GPIF Investment Committee Members at 22 April 2014                          (Membership reduced from ten to eight)

Yasuhiro Yonezawa*;

Professor at Graduate School of Finance, Waseda University. Sits on the 21-member group advising the Ministry of Health, Labour & Welfare on its most recent five-year review, now underway, of public pensions and on a 10-member MoHLW committee which last month proposed that GPIF set a new investment return target of 1.7% plus the rate of wage. Has said the fund no longer needs a focus on domestic bonds.

Sadayuki Horie*;

Senior researcher at Nomura Research Institute Ltd. and previously worked for Nomura Asset Management Co – the sole member with asset management expertise.

Kimikazu Noumi; reappointment

President and chief executive officer of Innovation Network Corporation of Japan.

Hiromichi Ono; reappointment

Board director of Ajinomoto Co

Setsuya Sato;

Professor in the English communications department of Toyo University. Once served as a financial adviser to the World Bank and public policy director at UBS AG.

Junko Shimizu;

Professor of international finance at Gakushuin University in Tokyo

Isao Sugaya*;

Managing director at the Japan Trade Union Confederation, known as Rengo.

Yoko Takeda;

Chief economist at the Mitsubishi Research Institute Inc.

* Also served as a member of the committee, chaired by Takatoshi Ito, appointed by the cabinet office to review the asset allocation and governance of GPIF and several civil service mutual aid associations which pay pensions’to public employees.

Outgoing GPIF Investment Committee Members

Nobuo Inaba, chairman;

Director; Corporate Executive Vice President, Ricoh Co Ltd, President; Ricoh Institute of Sustainability and Business

Masaharu Usuki, vice-chairman;

Professor at Graduate School of Economics/Faculty of Economics, Nagoya City University

Takashige Komoda;

Director General of JTUC [Japan Trades Union Confederation, or Rengo] Research Institute for Advancement of Living Standards [known as Rengo-Rials].

Masato Murakami;

Senior Executive & Director of Mizuho Pension Research Institute Ltd.

Kimikazu Noumi,

CEO of the Innovation Network Corporation of Japan

Seki Obata;

Associate Professor at the Graduate School of Business Administration, Keio University

Hiromichi Ono;

Member of the Board & Corporate Vice President of Ajinomoto Co, Inc

Hisae Sato;

Chief Investment Officer and General Manager in the Treasury Department at Nissan Motor Co Ltd

Kazuo Ueda;

Professor at the Graduate School of Economics/Faculty of Economics, University of Tokyo

Jun Uno;

Professor at the Graduate School of Finance, Accounting, and Law, Waseda University

© 2014 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes commitment, 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

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


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Tokyo’s foreign fund firms pay more than locals – here’s why

Staff compensation accounts for 39% of total expenditure at Tokyo’s overseas–headquartered fund managers but only 26.3% at their Japanese counterparts, a recently published study by Cerulli Associates and Nomura Research Institute shows.

The existence of this difference has been known for many years so it is unfortunate that the research appears to have made no attempt to find out the cause.

Also missing from findings are any bottom line figures in yen, or another currency, so it is impossible to know if the gaijin pay more because they make more.  However that seems unlikely since the profit margins of foreigners are given as 9.2% of their costs structures compared with 25.2% for locals.

The biggest difference in outlays – 14.8% of the total for foreigners and 7.5% for domestic firms – is in ‘bonuses and benefits’ which, now that expatriate executives are rare, is unlikely to come simply from maintaining them and their families in the Japanese capital.

The salaries gap is somewhat more modest at 24.2% of costs at overseas firms and 18.8% at their local counterparts.

It was not until the mid 1990s that asset managers were allowed to do institutional investment business in Japan. Although the investment trust arms of securities companies had been able to offer mutual funds for many years, they were ruled out of the new business so it was taken on largely by banks.

All the players were starting from scratch but overseas firms could at least bring to the table skills acquired elsewhere whereas Japanese banks simply rotated regular staff into their new subsidiaries and expected them to pick up knowhow they went along.

The foreigners’ reward was to shoot quickly to the top of league tables where they remained until a decade-long consolidation in the local banking sector finally finished and gave management the time to focus their now mature asset management operations.

By then there was an entrenched expectation that foreigners would pay more and although the need to offer money as balm for the stigma of working for gaijin is no longer as strong as it was, the perception that foreign firms will cut staff at the first hint of a downturn is.

As cast-off employees find it difficult to get a new employer in Japan, foreigners pay a premium over the going rates to acknowledge such concerns.

While asset management firms are now allowed to do both mutual fund and pensions management business the new study does not note whether the two types of business still have different cost structures.

The NRI Cerulli study Asset Management in Japan 2013: Opportunities and Challenges for Foreign Managers costs US$15,000. An information pack about its content is here. Summary (and more up-to-date) versions of some of its tables appear under the ‘rankings’ tab at the top of this page.

© 2014 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes commitment, 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

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



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GPIF seeks managers for bond portfolio charting new course

The Government Pension Investment Fund, the world’s largest institutional investor, is seeking active and passive managers of foreign high-yield bonds, inflation linked bonds and emerging market debt, all of which are being added to its portfolio for the first time.

The deadline for submissions is 20 May 2014. The details are here (in Japanese only). A Bloomberg story giving the basics in English is here and a slightly fuller, updated Reuters version is here.

The Fund’s contact points for these mandates are:  email, telephone 81 3 3502 2496, fax 81 3 3503 7424

Good luck!

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Tokyo gets stewardship code, foreign markets fail to piggyback

The Financial Services Agency is inviting institutional investors to sign up to a new stewardship code designed to help institutional investors meet their ‘responsibilities’…

‘ … to enhance the medium-to long-term investment return for their clients and beneficiaries …  by improving and fostering the investee companies’ corporate value and sustainable growth through constructive engagement or purposeful dialogue.’

FSA logoThis simultaneously implies an alignment of interests which does not quite exist and begs the question of why the normal discipline of the marketplace —  which elsewhere punishes sluggish growth at a company by selling its shares –  does not work in Japan.

The Agency’s invitation positions the purpose of the Code in the context the Liberal Democratic Party’s return to power in December 2012 when it established the ‘Headquarters for Japan’s Economic Revitalization within the cabinet [there] to formulate [the] necessary economic policy measures and growth strategies’.

For Prime Minister Shinzo Abe one such step is tempting much of Japan’s 1.5 quadrillion yen stock of out of bank accounts (said to account for 874 trillion yen) and Japan Government Bonds (JGBs) and into the stock market.

This should produce a three-part transmission mechanism, or ‘virtuous cycle’ and LDP politicians like to say,  which boosts the economy by:

* Expanding the stock market’s ability to raise capital for growing new companies;

* Fuelling stock prices rises, thus promoting a feeling of prosperity among new investors and enabling them to spend on consumption (for at least as long as equity prices do not fall),

* Accelerating the end of deflation as spending on consumption raises prices.

The Stewardship Code adds to this by asking both institutional asset owners and their fund managers to keep companies on a ‘sustainable’ growth course.

Market discipline should be doing the job

But is this their job? And would Japanese investors not be better off  investing in markets where such regimes have, by culture or legislation, already taken root — especially now that their currency’s 30-years of continuous appreciation appears to have ended?

Analysts at asset managers signing up to the code  will necessarily be the ones expected to  identify investee companies’ lacking in dynamism. Yet their expertise lies in valuing entities in the same sector relative to each other and demonstrating that via such measures as stock-price-to-earnings ratios.

They are not management consultants. But the Code expects them to provide tailor-made advice, based on an thorough knowledge of the internal workings of each business, even though their problems may well be sector-wide.

Moreover Japan’s institutional investors are mainly defined benefit pension funds or life companies and the prospects that, say,  any of Toyota Motor Corp’s retirement schemes will allow its external fund managers to tell Nissan Motor Corp that has its strategy wrong are nonexistent.

Even pointing up accounting problems such as those at Olympus, which analysts should have spotted tackled under the existing regime, have proved culturally difficult.

Cross-holdings still getting in the way

In jurisdictions where market discipline works well, a company performing below its potential will have its stock sold off, reducing its value and making it vulnerable to takeover.

It was precisely to prevent such outcomes that Japan developed its extensive system of cross-shareholdings among friends and despite much progress in recent years this protective web persists.

Yasuhisa Shiozaki (right), the Harvard-educated actingYasuhisa Shiozaki chairman of the LDP’s Policy Research Council and long time ally of Mr Abe, said in a recent interview with the Nikkei he thinks that:

 ‘Japan … could implement regulations to reduce cross-held shares within a deadline of five years’ but did not say when such rules might be written.

He noted too that ‘cross-held shares were once pervasive in Germany … until former German Chancellor Gerhard Schroeder oversaw reforms to pare back the practice. This helped improve the efficiency of companies’ .

Mr Shiozaki reports a ‘very stimulating discussion’ on this point with Mr Schroeder with whom he also spoke on the requirement in the UK and German governance codes for companies to appoint a certain number of outside directors.

Shiozaki: When I become Prime Minister

He believes such codes ‘carry more weight than principles mandated by securities exchanges’ and that in Japan the Ministry of Economy, Trade & Industry would anyway not approve efforts to mandate appointments of several outside directors based on securities exchange rules ‘reflecting opposition from [the] Japan Business Federation’.

He then added, intriguingly ‘I plan to enact the changes in one shot if I become prime minister’.

Stewardship codes may work well in jurisdictions where corporations know that they exist to serve the interests of not only customers and staff but of stockholders as well. This is all to often not so in Japan where boards are composed of long serving staff members who joined right after university.

It is unclear who how implementation of the charter’s provisions will be policed but as they are – unusually for Japan –  principles- rather than rules-based, they will provide the sort of scope that officials from the Ministry of  Finance, the Financial Services Agency’s mother-ship,  like to run around in.

In contrast to this softly- softly approach, insider trading is covered by legislation which in June last year was extended to cover those who leak information, as well as those who trade on it, and to vastly increase fines.

The first list of signatories to the new Code will by published in June according to Motoyuki Yufu, Director of the Agency’s Corporate Accounting and Disclosure Division.

Signatories soon but benefits will take longer

Listed companies with pension funds will no doubt see the public relations value of signing up and asset managers will do so because if they do not they are unlikely ever to see a mandate from the mighty Government Pension Investment Fund.

Even so, results in terms of economic revitalisation could take a long time to discern and investors wanting to benefit  from putting their money into markets where discipline prevails may meanwhile be doing themselves and their country a favour by looking overseas.

Japan’ dire demographics, contracting workforce and, ultimately, shrinking economy,  have long meant that pension funds and individuals investing for retirement should follow the example of so many successful Japanese companies and look to investing in markets with greater growth potential.

Implementation of this strategy has had to be delayed as the yen’s 30-year strengthening which cut savagely into any gains when they were translated back into the home unit.

To the government’s relief, while this pattern has not yet been reversed to provide profits on translation,  it does appear to have halted.

The yen’s value is critical to asset allocation

The weakening was helped by both retail and institutional investors selling yen in order to buy the 71tr yen of foreign securities they acquired last year, bringing total overseas holdings to a record 478 trillion yen, according to the Bank of Japan.

The trend to venture overseas –felt so far more in fixed income than in equities –  is likely to continue and both domestic and overseas asset management firms are gearing up to meet demand.

Many of these managers are headquartered in jurisdictions where market discipline is observed as a matter of enduring principle, rather than a device for achieving other objectives.

Indeed, it is so taken for granted that their authorities and exchanges are failing to put it across to Japanese investors searching for something beyond Japan Government Bonds and US treasuries to put their quadrillion yen hoard, even as their own regulators are stressing the point.

yen diceAs often this blog has often noted, the big question in Japanese asset allocation is not whether it will fulfill the desires of Abenomics by moving capital from bank accounts and fixed income and to equities.

It is, rather, how much will flow abroad – thus fulfilling another Abe dream of keeping pressure  on the yen which could so even more  for the economy.

© 2014 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes commitment, 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

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

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GPIF radically revises approach to domestic stocks, its way

The Government Pension Investment Fund scored a quiet triumph at the weekend when it announced, in its own time, the introduction of new yardsticks for measuring the performance of the domestic equities segment of its portfolio, appointed fund managers to produce that performance and tied the fees of some to delivering it

GPIF has been the focus of strident and poorly informed demands since  November, when a government committee asked it to look at amending parts of its investment strategy so as to support the ‘growth’ companies and better all-round corporate governance that are said to be central to Abenomics’ chances of success.

Devoid of rhetorical flourishes or self-important statements, the announcement by the Fund uses tables to clarify a thicket of detail while, unfortunately, adhering to an earlier practice of omitting the amount awarded under each mandate.

The keep-it-simple approach by the world’s biggest institutional investor paradoxically points up the complexity underlying such reorganisations and why they cannot be done in a day – as the chairman of the government panel (going well beyond the body’s published recommendations) had demanded in the press.

Also taken up by the media was the panel’s suggestion that the Fund use the new JPX-Nikkei 400 Index as a benchmark for the performance of its passively managed Japanese equity investments.

To be included in this new measure a company must have high returns on equity and have adopted specific governance standards including IFRS accounting and having at least two independent directors

A shift to the JPX-Nikkei 400 Index does indeed feature in the recent announcement with mandates tied to it going to DIAM Co, Sumitomo Mitsui Trust Bank and Mitsubishi UFJ Trust & Banking.

Far more interesting is the creation of the new portfolio category of ‘smart beta’ under which mandates go to:

* Goldman Sachs Asset Management Co – using S&P GIVI Japan (gross total return) ,

* Nomura Funds Research & Technologies – MSCI Japan Small (gross dividends),

* Nomura Asset Management – Nomura RAFI reference index.

RAFI indices use a method developed by the California-based Research Associates which breaks the link between a company’s market capitalisation and its stock price as entities are selected for inclusion on the basis of such fundamentals as their total cash dividends, free cash flow, total sales and book value.

The large suite of approaches now covered by GPIF’s domestic equities portfolio  still includes traditional active management for which 11 firms have been appointed, some of them with fees that are now performance-based.

While the list included in the announcement marks with asterisks those firms already holding current mandates in this category, several more have done so until recently and others hold mandates for different components of the portfolio (see the several tables under ‘The Giants’ tab at the top of this page).

The only total ingénues are: Eastspring Investments (owned by Prudential plc of the UK), Capital International and Seiryu Asset Management which is sub-advised by Taiyo Pacific Partners LP based near Seattle in the US state of Washington.

The announcement has allowed the Fund’s critics to say ‘We told you so. This is what was needed’ and GPIF to say ‘We have been studying this all along, there was no need to be so noisy’ — and all while not mentioning the absence of any change, as yet, in the bond portfolio. Fixed income was at the centre of a recent row but the Fund has handled itself with such aplomb that its critics may have to learn to be more cautious or end up looking silly.

© 2014 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes commitment, 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

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

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The Nikkei’s abominable no-men strike again, market rises

Just one day after the start of the financial year yesterday (1 April) the Nikkei newspaper group (Nihon Keizai Shimbun) was demonstrating again what a grip it has on news and data about job-based pension funds, and why it needs competition.

At 0205 JST it reported in very definite tones, but without giving the source of the information, that the Government Pension Investment Fund:

‘… will begin investing in funds specializing in Japanese stocks with high returns …. [it] will tap Goldman Sachs and other companies to handle investments. Each is expected to invest between 200 billion yen and 400 billion yen…’

Neither the GPIF nor the Goldman Sachs Japan web site has a press releases on the matter so what was the source?

It could have been a leak from either the Ministry of Finance, as part of its continuing efforts to create an impression it hopes will mold reality, or it could have been the Ministry of Health, Labour & Welfare [MoHLW], to which GPIF reports, trying to look as though the Fund is going along with what an MoF-appointed panel wants (see posting immediately below) while allowing it to complete its current actuarial review before deciding what to do.

The Nikkei then threw in a bit a cheerleading for Abenomics, which it followed with some logic that ain’t necessarily so, saying:

‘As the economy’s prospects for an escape from deflation grow, the public pension will consider boosting the percentage of active investments by pumping more money into stocks. ‘

Why Goldman Sachs should be picked out for special mention is not clear but in the year ending 31 March 2013 it apparently lost a 187 billion yen mandate from GPIF for actively managed international stocks (see the several GPIF tables under ‘The Giants’ tab above). Perhaps the firm now has it back.

At the same date only eight of the Fund’s 31 managers had stewardship of amounts under 200bn yen  (see under ‘The  Giants’ tab for more).

At 04.18  JST the Nikkei reported that ‘Japanese corporate pension funds recorded positive returns for the third straight year in fiscal 2013 …  Investment returns averaged 8.8% …  according to data compiled by Rating and Investment Information [R&I] on about 130 domestic corporate pension funds.’

As tens of thousands of Japanese companies have retirement schemes, 130 is probably not a representative sample. The story notes neither that R&I is an actuarial consulting firm, so the 130 are probably its clients, nor that it is a subsidiary of the Nikkei.

R&I also publishes a very expensive fortnightly newsletter, Nenkin Joho  [Pensions Information], which is the country’s sole pensions periodical – a stark contrast to the US, Canada and, especially, the UK which have plethora of such publications many of them sent free-of-charge as they are paid for by advertising.

Given the scale of the Nikkei’s presence in the sector it will have naturally built strong working ties with the MoHLW in addition to those which it has, for similar reasons, with the Ministry of Finance. Both government entities have, equally naturally, come to expect that they if they want a story to appear it will – anonymously and with no second source to back it up.

At 16.17 JST the Nikkei carried a Dow Jones story from Singapore under the headline ‘GPIF buying may boost Nikkei by 5% near-term: hedge fund’.

The four-paragraph report summarised the Nikkei’s earlier story and gave a paragraph each to one fund manager based in Paris and another in Chicago. Both evinced the view reflected in the headline and added a few flourishes.

At the Tokyo market close the Nikkei 225 was up 1.04%.

This index is a proprietary product of the Nikkei newspaper group which also has a large interest in the JPX-Index 400, a new measure covering ‘growth’ companies which it and others are keen that GPIF adopt as a benchmark for its portfolio.

To be a constituent of the new index a company must have just the sort of ‘high returns’ the Nikkei 0205 JST story says GPIF will  invest in.

The cycle in which GPIF is tipped in the media to begin buying equities, followed by comment that this will boost stock prices, followed by a, usually short-lived, rise in stock prices, keeps on turning –  and looks very like a money-making ruse.

More positively, publication yesterday of GPIF’s latest report on how it is meeting the medium-run targets set out after its previous actuarial review, which covered the years 2010 to 2015, hints that it could be more transparent in future: an outcome devoutly to be wished and one which could put a stop to at least the cruder sort of speculation.

© 2014 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes commitment, 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

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

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Ito talks MoF’s book, draws bulls-eye round where arrow lands

‘A “government panel on financing for economic growth” is to recommend greater official oversight of how the Government Pension Investment Fund selects its 100 trillion yen of investments, according to the [subscription only] citing no sources.

‘The move would be just the first step in “strengthening” official oversight of the portfolio practices of GPIF as well as those of the huge civil service pension funds (known as mutual aid associations) and the management of Japan’s foreign exchange reserves…

 ‘Currently only in draft form, the panel’s report will, according to the Nikkei, be forwarded next month to another government group for inclusion in a “forthcoming national revitalisation strategy”…

‘It is worth noting that the Nikkei is a favoured venue for the  government to send up trial balloons. This has resulted in its being either 100% right or wholly wrong when some proposals are shot down before they see the official light of day.’

     ijapicap, 30 June 2012 (see archive for full posting)

The Nikkei was sure right this time and it looks as though the findings of the Panel for Sophisticating the Management of Public/Quasi-public Funds’ were being signalled a year before it first sat, and six months ahead of the general election which returned the Liberal Democratic Party (LDP) to power with ‘revitalization’ as a watchword.

Dominated by ideas which have been tried before with only neutral-to-negative results, the seven-member panel’s recommendations elide any points that do not fit its overarching idea about promoting growth by redeploying Japan’s massive household savings, starting with those held by GPIF.

Text continues below tableBank of Japan Flow of funds Sep 2013 Financial assets of households

The proposals appeared on 30 November and were repeated three weeks later when they were incorporated into the findings of a six-person Panel for Vitalizing Financial and Capital Markets.

The second document also conjures up a whole alternative universe in which Tokyo becomes a leading international financial centre. Yet the city lacks this status today because the Ministry of Finance (MoF) systematically obstructed the dynamics that would have propelled it there naturally but which it is now too late to recapture.

Akira Amari, Minister in Charge of Economic RevitalizationBoth panels were set up by Akira Amari (left), the Minister in Charge of Economic Revitalization. As this post is not attached to a government department panel members were appointed by the MoF under Minister of Finance Taro Aso, a former Prime Minister (9/2008-9/2009) who had Akira Amari as his Finance Minister.

Both panels were chaired by, Takatoshi Ito, Dean of Tokyo University’s Graduate School of Public Policy, an academic economist with no work experience in either capital markets or funds management but who was the MoF’s Vice Minister for International Affairs (a civil service post) from 1999 to 2001.

Not every government department has the foresight and the manoeuvrability to act as the MoF has done. Its senior bureaucrats saw that the previous Democratic Party of Japan-led government was becoming so unpopular it was likely to lose the next election. So it, in effect, said to the LDP: We will help you return to power, then you do the same for us.

By 2012 MoF’s influence, in relation to pensions in particular, was waning. Its Trust Fund Bureau was being obliged to return the money it had forced to Nenpuku (GPIF’s forerunner) to put into the Ministry’s Fiscal Investment & Loan Programme (FILP) and even its responsibility for supervising civil service retirement schemes was set to go by 2015 to the lowly (in MoF’s view) Ministry of Health, Labour & Welfare (MoHLW).

With a raft of economists on its staff the MoF was easily able to make a case for redeploying savings as a means to push the economy forward – and via moves that would also promote its own role.

A historian may have served it better

The pensions landscape in Japan before the 1995 reforms was much the same as that in the US before 1975  — when the Employee Retirement Income Security Act (Erisa) was passed and the funds management industry changed forever.

Neutral-to-negative ideas: PKOs, FILP and the 5-3-3-2 rule

In those days a Japanese pension fund sponsor put everything – administration, investment, custody and so on –  into the hands of the life insurer or trust bank of its choice. This was usually an entity within the same keiretsu (or business group).

Change was slow to come because these institutions, which benefited mightily from the system, fought to keep the status quo and government colluded so long as it was able to direct them to use the pension assets under their stewardship to prop up with any market it wished to support.

So as the stock market went into a tailspin soon after the Nikkei 225 index hit an intraday high of over 40,000 in December 1989, government asked the life cos and trust banks to buy equities.

Columbia University’s Center on Japanese Economy and Business has analysed the workings of these ‘price-keeping operations’ (PKOs) conducted  from August 1992 and November 1993. The results are here.

As an attempt to push pensions savings into equities, and thus raise prices, the exercise was not a success.

At the same the MoF’s Trust Fund Bureau was siphoning from people’s mandatory contributions to the national basic pension scheme, held by Nenpuku, any monies not immediately used to pay benefits and putting them into the Fiscal Investment & Loan Programme (which came to be dubbed ‘the second budget’).

The FILP’s job was to fund projects that would supposedly prime the economic

FILP funded roads that went nowhere
FILP funded roads that went nowhere

 pump. The result was a bonanza for the companies of the so-called cement tribe – many of them LDP supporters –  and for infraststructure building which provided some temporary stimulus to local economies.  However, as little of it was sustained, this re-purposing of retirement savings failed too.

The pensions reforms of the 1990s meant that by the end of the decade the 5-3-3-2 rule enforced by the Ministry of Health, Labour & Welfare was at long last dead. It stipulated that at a minimum 50% of a pension fund’s portfolio should be kept in yen-denominated fixed income (essentially JGBs), a maximum of 30% each in Japanese equities and foreign securities and no more than 20% in real estate.

The end of the 5-3-3-2 rule came ten years too late for pension funds – with half their portfolios tied up by fiat in JGBs – to capture the gains of the 1980s stock market boom. The shift also came too late to help the MoF’s push (via PKOs) to support equities prices.

In justifying its call for GPIF to put more money into equities, the report of the Panel for Sophisticating etc points up the practices of its public and quasi-public fund ‘peers’ abroad (here page 18) and has drawn attention to Norway’s Government Pension Fund.

Any parallels are hard to see.

*  Norway’s population is just over 5 million and very much on a growth track with some forecasts putting it at over 7 million by 2060.  Japan has a population of 127.52 million which is falling and will be 10 million smaller by 2060

Norway is different

Norway is different

*  The Norwegian Government Pension Fund gets it cash from the sales by the country’s massive and oil and gas sector whereas those of GPIF come from citizens’ contributions to the national basic pension and (since the early 2000s) those they and their employers make to a supplementary scheme.

*  Norway’s fund is half the size of GPIF.

*  Japan’s dire demographics mean that GPIF has already passed the tipping point to where it will forever have more going out each year in benefits then it has coming in through contributions. The Norwegian Fund has no current pensioners and no immediate prospect of having any.

This last makes GPIF’s investment income all the more important and suggests it should exercise caution in allocating its portfolio. As officials at the MoHLW, to which it reports, have been quick to point out, Prof Ito’s panel does not say who will pick up the tab if the Fund incurs losses.

There are also significant silences in the report of Prof Ito’s second panel, on Vitalizing Financial and Capital Markets, including the curiously missing ‘re’ prefix which implies that these markets have previously lacked vitality which is plainly not so. The omission also avoids having to explain how they lost it.

This report too sets its proposals in the context of (page 7)  ‘Establishing a positive cycle in which abundant financial assets held by households and public pensions are allocated to funding more growing businesses…’

Improving English-language skills, overcoming taxation and immigration issues and even establishing Japanese versions of such fora and the ‘Davos Conference and Chatham House’ are all noted as milestones to be met if Japan is to become ‘Asia’s number one international financial center by 2020’.

Red tape and civil servants with no private sector experience or understanding, who believe they can bend a market to their will and still have a market, are not mentioned. Yet these have been killers in the past.

The Japanese civil service strangled the first force that would have propelled Tokyo to near the top of the financial services league in the early 198os. It was then that the MoF fought against the establishment of a yen-denominated bankers acceptances market as part of its bigger battle against the internationalisation of the yen – which would lead it to commit many other blunders

No internationalisation please, we're Japanese

No internationalisation please, we’re Japanese

American willingness to promote a dollar BAs market to finance its trade – one of the reasons the Federal Reserve was set up in 1913 – along with the size of the US economy, and, ultimately, the depth of its financial markets, had by the 1930s enabled the US to overtake the UK as the world’s banker, and the dollar to displace sterling as its currency.

Taking the same route would have made sense for Japan but opening a yen-denominated BAs market met with determined bureaucratic resistance. Even today, when trade can be denominated for settlement in yen, which is to Japan’s advantage, a thicket of regulations means it is more practical to finance a transaction (i.e. from the point the seller receives an order to the buyer taking ownership of the goods) in US dollars.

Demand in the stock and samurai bonds markets has also met the same stifling red tape.

*  For years now there have been more foreign companies delisting from the Tokyo Stock Exchange than listing on it.

*  For all the talk of the huge amount of households savings held in yen, last year saw a mere 68 issues of samurai (non-residents’) bonds to raise just 1,367 billion yen. This compares with 153 issues for 3,874bn yen in 1996 .

(The strength of the yen and conditions in the three-year dollar/yen swap market have, of course, played a part in dampening investor appetites as noted this recent Reuters story.)

In forex, Singapore has been eating Tokyo's sushi

In forex, Singapore has been eating Tokyo’s sushi

Although the Nikkei recently trumpeted Tokyo as potentially taking back from Singapore the top slot in Asian foreign exchange trading, the city will still have to show that it can hang on to it this time round.

Part two of the Vitalizing report is devoted to ‘Realizing Asia’s growth’ and resuscitates one of the MoF’s oldest dreams: telling other Asian bureaucrats what to do.

Or as the report has it:

‘With a view to contributing to Asia’s economic development and improving the market functions of the whole region, thus achieving growth alongside Asia, it is important that Japan, by strengthening cooperation between FSA [Financial Services Agency, part of the MoF] and other countries’ respective authorities, provides various support to enhance market functions in Asian countries as a whole. This includes support for the development of financial infrastructure and improvement of the business environment for Japanese companies and financial institutions.’

It is not clear why Asian nations would wish to take advice from the MoF on how to ‘enhance’ market functions or on improving their financial infrastructure. Why the Ministry’s seniors staff would seek to give such counsel is much more obvious and should not be underestimated: they see it as a nice retirement job.

Since the LDP returned to power just over a year ago the amakudari system, which was discouraged under the DPJ, has returned to health with retiring bureaucrats heading for lucrative and prestigious positions.

Thus Hiroshi Watanabe and Koichi Hosokawa, both former vice ministers at the MoF, have  become, respectively, president and CEO of the Japan Bank for International Cooperation and governor and CEO of the quasi-government Japan Finance Corp,. Meanwhile Hideji Sugiyama, formerly a vice minister at the economy ministry, has become president of  Shoko Chukin Bank

Legislation to effect changes by 22 June?

Soon after publication of the Sophisticating report it was mooted that legislation governing GPIF’s asset allocation as well as that of the large civil service schemes would be presented to the Diet within the current parliamentary term which ends on 22 June.

Putting under the external stewardship the management of parts of Japan’s foreign reserves – the third pool of money mentioned in the MoF’s June 2012 plan— already has the go-ahead but has not yet begun as, according to Finance Minister Taro Aso, there is still some internal disagreement.

This would be unsurprising if, as in the past, it was proposed to put some of the foreign currency funds into domestic, yen-denominated investments.

Neither of the reports from the panels chaired by Prof Ito makes an adequate case for re-purposing the nation’s retirement savings away from the provision of pensions and towards general economic growth in the hope that shift will feed positively back into old-age nest eggs.

While Maynard Keynes taught that confidence can be more important than economic fundamentals, confidence and hope are not the same thing.

Unsubstantiated claims lose public confidence

Moreover there can be few faster ways to lose the public’s confidence than expecting it  to put its faith in a set of unsubstantiated assertions that will potentially take a toll on their pockets at a time –  retirement – when they can least afford financial shocks.

Even Prof Ito implicitly acknowledged the paucity of the case presented by the panels when he used his Financial Times article, responding to the paper’s interview with GPIF president Mitani,  to introduce the argument that an overexposure to bonds could lead to a situation which may ‘… deprive future pensioners of asset growth .. [and lead to] .. higher contributions.’

In the next paragraph, however, he reverted to unsubstantiated claims saying: ‘The current GPIF management is violating its fiduciary duty, and the Ministry of Health, Labour & Welfare will violate its mandate of increasing the welfare of workers if it fails to lower the benchmark share of domestic bonds.’

This looks like an attempt to pre-empt the findings of the Fund’s scheduled five-year actuarial review which has just been put under way.  Prof Ito also seems not know that a shortcoming of Japan’s regulatory environment relating to pensions is that it lacks a definition of fiduciary duty.

He then added: ‘Takhiro Mitani … said that he suspected the panel’s report was written with the short-term view of supporting Japanese stock prices. He is much mistaken.’

Text continues below table

Nikkei 225 15 Nov 2013 - 25 March 2014 3

This just as well as the stock market seems to have become fed up with responding to reports – some of them very confused and lacking anchors to their context – about the course GPIF is expected to take.

As to whether a law will be introduced in this parliamentary session enshrining what Prof Ito wants from GPIF; it is more probable that the move will be postponed to allow ‘ time for the public to better informed’, or some such, and until after the quinquennial review is through.

After that the cabinet reshuffle expected in the summer will provide a good opportunity for a rethink which could lead, in turn, to any legislation to being amended or eclipsed.

Perhaps the MoF thinks so too because in a story which appeared in the Nikkei on 28 March it appeared to be trying to get ahead of the game. The report shares with its June 2012 predecessor the MoF/Nikkei hallmarks of anonymity and certainty.

Notwithstanding that GPIF’s five-year review has only just begun, the Nikkei  announced the path which the Fund’s asset allocation, and that of the three big civil service mutual aid association, will be taking from the year starting 1 April 2015. For what it said see the end of the chronology below this posting.

Claim and counterclaim countdown

GPIF asset alloc December 201320 November 2013: the seven-person Panel for Sophisticating the Management of Public/Quasi Public Funds, which gathered under the chairmanship of  Prof Takatoshi Ito, Dean of Tokyo University’s graduate school of public policy, publishes it final report.

takatoshi itoFollowing the panel’s interim report Prof Ito had noted (see archive 27 September) that “It does not say anywhere in here ‘Increase bond investments’. But you can read ‘reform bond-centric portfolios’, as [being that] it is better to lower the percentage of bond holdings… But I don’t think we as a panel will go as far as to say specifically how much of other assets holdings to increase to make up for a decrease in bond holdings.”

The final report continued to argue for changing the Fund’s asset mix in the expectation that a shift from government bonds to equities would in itself speed up the country’s exit from the deflation – the Abe government’s chief domestic policy aim.

This is a reversal of the usual pattern in which investment follows expected economic expansion but bears no responsibility for initiating the expectation.

4th December 2013  GPIF president Takahiro Mitani tells Bloomberg that he does not see government reaching its annual inflation target of 2% by the end of 2014 but thinks instead that the rate will range from 0.1% to 1.0%.

Mr Mitani thus expects the Bank of Japan to continue with the quantative easing it is carrying out via massive Japan Government Bond (JGB) purchases, giving the Fund – which is just coming up to its 5-year actuarial  review –  time to think about if and when it should dispose of some of its JGBs.

6th December Prof Ito ripostes via Bloomberg: ‘GPIF needs to start reducing bonds as soon as possible… Now is the right time to sell, while BoJ is buying’.

As the ijapicap posting of 30 December (see archive) noted: ‘It is astonishingly naïve for the chairman of an advisory panel to expect its recommendations be implemented with no further consideration just days after they were made – especially when that would involve the disposal of securities worth over 9 trillion yen’.

13 December After sitting for just three weeks the six-person Panel for Vitalizing Financial and Capital Markets, also chaired by Prof Ito, publishes its findings. They incorporate the recommendations of its predecessor panel.

16th February 2014 the Financial Times reports Mr Mitani telling itsMitani GPIF Ben McLannahan that ‘The FSA [Financial Services Agency which comes under the MoF] should be doing what they are supposed to be doing, without asking too much from us’ and that Prof Ito ‘lacks understanding of the practical issues of this portfolio’.

17 February Bloomberg publishes an interview with Prof Ito, dated from three days earlier, in which he makes ever more specific asset allocation demands: GPIF’s bond holdings should be reduced to 40% of the portfolio within two years, stocks should be split evenly between local and foreign equities, etc.

This is in direct conflict with what he said following publication of the Sophisticating panel’s interim report (see 20 November above).

3rd March GPIF launches infrastructure co-investment program with the Development Bank of Japan and the Ontario Municipal Retirees System.

The move is widely reported as though it were the result of pressure on the Fund to diversify but it had been under consideration at least since April 2012 when the Pension Fund Association took a similar route (see archive Japanese join Canadian plan in huge new infrastructure fund).

3rd March Prof Ito contributes his own article to the Financial Times in which he says that the panel was established to answer the question ‘How much of [GPIF’s] assets should a public pension fund invest in bonds?’

The Fund’s role in economic revitalization, emphasized in the panel’s final report is not mentioned, only that GPIF is ‘exposed to too much risk from an expected rise in interest rates [which will come about as] a natural consequence of Prime Minister Shinzo Abe’s programme and Bank of Japan Governor Haruhiko Kuroda’s 2% inflation targeting.’

The idea, which he attributes to Mr Mitani, that the proposals are designed simply to send up stock prices is explicitly denied.

4th March the Prof returns to Bloomberg saying that Mr Mitani should be careful not to cause misunderstanding because investors are paying attention to everything he says and does [as Mitani-san must have been aware for years].

5th March Bloomberg reports that the professor had gone a little way to filing in the blanks in his panels’ arguments by noting at an LDP meeting that ‘Improved returns  [from the stock market] would lead to lower future pension premiums and a higher levels of future benefits.’

9th March The Nikkei reports that GPIF ‘plans to invest in infrastructure projects … in partnership with the World Bank, according to sources… This will be the first time the GPIF will make high-risk, high return investment in developing countries on this scale’ . The story does not say what that scale is.

Coverage of this development too makes it look as though the Fund is heeding government urgings.

An infrastructure fund was launched in October 2013 by IFC Asset Management, a subsidiary of the International Financing Corp which is part of the World Bank Group, with Asian sovereign and pension funds among its nine anchor investors. GPIF may have acquired a participation in this fund or be lining itself up for participation in a second.

Or this may just the Nikkei sending up another trial balloon on someone’s behalf.

17 March the tale takes a turn when Bloomberg reports that Kazuhiko Mishizawa, an economist at Japan Research Institute Ltd, who is a member of the preliminary committee advising the Social Security Council on GPIF’s quinquennial review, as saying it has been pressured into urging GPIF to increase its target returns and to boost its holdings of stocks because of the political need to affirm that Prime Minster Abe’s policies will work.

28 March The Nikkei reports that the government ‘is considering’ a revamp of civil service pension scheme strategies from 1 April 2015 and a review board, set to meet on 31 March, ‘will urge a shift away from a bond-centred approach’.

In the same tone of fait accompli the story goes on to assert that GPIF:

‘… has already decided to overhaul its investment strategy … now biased in favour of Japan government bonds …[and] GPIF and the three [civil service] pension programs will lift targeted returns by 0.1 percentage points to 1.7% .. and … [move away from] their current preference for passive management.’

The story does not mention that the reason the civil service schemes have so much in bonds is that their regulator, the MoF, has obliged them to make such ‘duty’ investments which – in the days before the Bank of Japan’s quantative easing programme – made the Ministry’s job of selling JGBs easier.

22 June Current Diet session ends to be followed by cabinet reshuffle.

 © 2014 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes commitment, 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

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

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Quinquennial GPIF review gets going, market misleads itself

The Japanese government’s Council on Social Security began a five-yearly review of the country’s pensions system on 6th March when Ministry of Health, Labour and Welfare officials met with members of a panel from which they take advice ahead of their own deliberations.

The panel outlined eight scenarios for managing the finances of the system, including those of the Government Pension Investment Fund, based on varying economic assumptions. The resulting yield targets are in the 3-6% range with 4.2% the most likely.

Speaking of the high-growth scenario panel member and University of Tokyo professor Kazuo Ueda told the Nikkei: ‘The likelihood is extremely low’.

An excellent curtain raiser to the action and what now follows is to be found here while the more confused version the stock market heeded – rising as a result – is here.

 © 2014 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes commitment, 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

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

Posted in Articles | Leave a comment