(Updates with release of report and news conference)
By Chikafumi Hodo and Noriyuki Hirata
TOKYO Nov 20 The world's biggest pension fund
is preparing its most ambitious overhaul since its creation more
than a decade ago, a process that will eventually see more of
Japan's $2 trillion in public funds invested in stocks and other
riskier assets and relatively less parked in government bonds.
An advisory panel to the government of Prime Minister Shinzo
Abe, in a highly anticipated report on Wednesday, proposed
far-reaching reforms to the Government Pension Investment Fund
(GPIF), encompassing fundamental change to its governance and
The scope of the proposals suggests Abe is serious about
making public funds more independent and equipped to generate
returns from Japan's enormous pool of public savings to support
its rapidly ageing society, rather than simply seeking to boost
the stock market.
But the complex nature of the reforms may mean that the 121
trillion yen ($1.21 trillion) GPIF - and the other funds that
typically follow it - are slower to shift their investments than
some investors were expecting.
The proposals fleshed out a September report that
recommended GPIF shift away from very low-yielding Japanese
government bonds (JGBs) and benchmark passive equity investments
to a new index based on returns.
"With regards to the reference about altering the JGB-heavy
portfolio, we mean that GPIF's weighting in JGBs is too high,"
Takatoshi Ito, the head of the panel, told a news conference.
Ito declined to provide specific targets, although he said
GPIF could lower the weighting of JGBs to the floor 52 percent
under its current allocation strategy, which could be done in
the near term.
Meanwhile, GPIF's new portfolio should be crafted after
receiving a new pension actuarial revaluation from the
government in March, Ito said.
The fund reviews its medium-term strategy every five years
based on these revaluations, with next year marking the review
for implementation in the financial year from March 2015.
It may not wait for this process to play out. In June, after
a relatively brief eight months, GPIF made the biggest changes
to its asset allocations since the fund was formed in 2001. It
raised the weighting of Japanese stocks in its core portfolio to
12 percent from 11 percent and cut JGBs to 60 percent from 67
As of the end of June, GPIF was 57.7 percent invested in yen
bonds, 15.2 percent in Japanese equities, 9.7 percent in foreign
bonds and 12.4 percent in foreign equities, with 5 percent in
cash and other short-term assets.
The panel also proposed setting up "baby funds" that could
take on more exposure to riskier assets in pursuit of higher
returns and added a recommendation to invest in inflation-linked
The baby funds that would be outsourced separately from the
core fund to allow them to take more exposure to riskier assets.
These could go beyond investing in conventional assets and into
alternative assets, such as private equity and infrastructure,
The recommendations mark a major step in Abe's hopes to
reform Japan's conservatively managed public funds to help pull
the world's third-biggest economy out of 15 years of deflation
and weak growth.
He wants the massive pools of money to have the resources
and expertise to generate higher returns as the country's
working population ages and payouts to retirees increase.
Similar recommendations in 2008 were ignored. But Ito said
the involvement this time of the Ministry of Health, Labour and
Welfare, which oversees GPIF, means the government has the will
to carry out the reforms.
The panel said GPIF should consider adopting a new benchmak
in passive investment of domestic equity investment, such as the
new stock index - which focuses on return on equity (ROE) and
Hopes that GPIF could adopt the index has has already helped
some of the 14 stocks that are in the JPX-Nikkei Index 400, but
not in the benchmark Nikkei 225 average or the broader
Fast-growing, e-commerce giant Rakuten Inc has
risen 9 percent since the ROE index was announced last week and
Seria Co Ltd, operator of a 100 yen-shop chain, has
jumped 13 percent, outpacing the 2.4 percent rise in the Topix
over the same period.
It is unclear how much GPIF money might flow out of Topix
and into the new index, but Ito said there will be no
"overnight" rush to the new benchmark. He said, however, that
the adoption of the index will prompt companies to improve
Overhauling GPIF's structure, which is important to its
ability to make sophisticated investments, will likely take more
time. The panel called for increasing the budgets of Japan's
thinly staffed public funds to hire experts and acquire the
resources to improve returns.
GPIF is an independent administrative agency, which has to
operate under a tight budget and has severe staff limitations
compared with large private-sector financial institutions. The
fund has fewer than 80 people managing its trillions of yen.
Converting it into a government-authorised corporation, like
the Bank of Japan, would provide more flexibility, but such a
change would require time and political debate over legislation.
"Whether our final report will be implemented depends on
political will," Ito said.
The panel wants GPIF to consider diversifying into liquid
asset classes, such as real estate investment trusts, when it
reviews it portfolio from April. But investment in illiquid
asset classes such as private equity, infrastructure and
property would have to await the organisation's overhaul.
($1 = 100.0350 Japanese yen)
(Additional reporting by Yoshifumi Takemoto, Emi Emoto and
Takaya Yamaguchi; Editing by William Mallard, Alex Richardson
and Simon Cameron-Moore)