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Japan's pension 'whale' dives into foreign bonds, spouting yen

GPIF set to reshuffle $1.5tn portfolio this month

A sperm whale makes waves off Hokkaido. Market watchers are keeping an eye out for stirrings in Japan's huge public pension fund.   © Reuters

TOKYO -- Currency traders are watching as Japan's Government Pension Investment Fund -- one of the world's biggest institutional investors -- is expected to increase its weighting in foreign bonds in a potentially market-moving portfolio review set for as early as this month.

Such a change to the 160 trillion yen ($1.5 trillion) pension fund's asset mix could serve to limit the yen's gains at time when the coronavirus outbreak is stirring up volatility in financial markets.

The GPIF now targets weights of 35% for Japanese bonds and 15% for foreign bonds in its portfolio, but market watchers expect the allocation for domestic debt to be cut as long-term interest rates hover in negative territory. Changes would take effect in the fiscal year starting April 1.

Nomura Securities' Masahiro Nishikawa says foreign bonds' weighting could grow to between 22% and 25% as a result of the expected rebalancing.

Given the sheer size of the fund, nicknamed "the whale," any change in its buying habits is felt broadly. Buying more bonds denominated in dollars or euros will entail selling yen, so raising the target to 25% would exert selling pressure to the tune of trillions of yen.

The GPIF's major portfolio revamp came in October 2014, when the target allocations for domestic and foreign stocks were each increased to 25% from 12%. Domestic bonds were slashed to 35% from 60% amid subzero yields.

The 2014 rebalancing had the effect of pushing up the Nikkei Stock Average by around 2,000 points, according to Toshihiro Nagahama of the Dai-ichi Life Research Institute.

This time, there are hopes that the government will invest more heavily in stocks to lift a market hammered by coronavirus fears, according to a Japanese-equities salesperson at a foreign brokerage. Norway's oil-fueled Government Pension Fund Global invests 70% of its assets in equities, for example.

But "putting a majority of holdings into risk assets is not a realistic scenario" for the GPIF, said an official at the Ministry of Health, Labor and Welfare. The weightings of domestic and international stocks already reach a combined 50%. The 25% allocation to Japanese stocks is considered particularly high, given that they make up only around a tenth of global equity market value. This has sparked criticism that the fund shows an excessive home-country bias.

The GPIF's holdings of Japanese bonds fell to 26% at the end of March 2019 from 41% at the end of fiscal 2014. The current exposure is unknown, however, because the fund stopped releasing quarterly asset allocation data this fiscal year ahead of the expected portfolio review. Domestic-bond holdings likely slipped to 23% at the end of December, Nomura's Nishikawa estimates.

The likely decline follows remarks by GPIF President Norihiro Takahashi last July that reinvesting funds from matured Japanese bonds is not an easy task.

Speculation is mounting that such funds are already pouring into foreign bonds. The GPIF's holdings of international debt likely reached 18.5% at the end of December, Nishikawa estimates -- just shy of the 19% ceiling.

That said, the cost of buying more U.S. Treasurys has risen as long-term interest rates in America have plumbed new lows.

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