|‘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] Nikkei.com 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 table
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.
Both 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
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
* 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
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
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
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
20 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.
Following 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 its 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 www.ijapicap.com.
This blog would not exist without the help and humour of Diane Stormont, 1959-2012