TOKYO, March 6 Advisers to Japan's $1.26-trillion public pension fund on Thursday recommended targeting only slightly higher returns, a conservative proposal that could constrain the fund's ability to shift to riskier assets.
Prime Minister Shinzo Abe's government is pressing the Government Pension Investment Fund (GPIF) to buy more stocks and invest relatively less in bonds to generate higher returns for Japan's fast-greying population.
But the advisory panel appeared to differ with Abe, with assumptions in a draft report that imply a return target of 4.2 percent, little changed from the current target of 4.1 percent, which was adopted at the previous review five years ago.
The panel reports to the Health Ministry, which regulates the world's biggest public pension fund.
The panel recommends targeting 1.7 percentage points above nominal wage increases, versus 1.6 points now.
GPIF has leeway in deciding its asset allocations, but the panel's recommendations form the basis for the fund's decisions.
Stock market bulls may take heart that the panel said GPIF need not stick to a "domestic-bond-centric portfolio" when the country is moving out of deflation, although the panel's report said the fund should take the smallest possible risk to achieve its targets.
Given its size - bigger than the annual economic output of Mexico - GPIF is coveted by politicians and can have a big impact on financial markets if it shifts its investment flows. Some of the "Abenomics" rally in Tokyo stocks over the past year has been driven by expectations that the fund would shift toward stocks and away from bonds.
The current actuarial review is crucial because the return target will be used to set new allocation targets for GPIF, which now invests 60 percent in Japanese government bonds and 12 percent in Japanese shares.
A separate Abe-appointed panel led by Takatoshi Ito, a Tokyo University professor, said in November that GPIF and other public funds should seek higher returns as the working population ages and payouts to retirees rise, by increasing investment in equities and infrastructure as an alternative to JGBs.
The Abe administration has signalled it wants GPIF to compile an allocation model as soon as June that would cut the weighting of domestic bonds and direct more into domestic stocks, a government source said.
GPIF has averaged about 2 percent annual returns since its launch in 2001. That is well below the target but returns have maintained their targeted premium over wages, which have stagnated or fallen during Japan's long period of deflation.
The fund's assets have grown by 19 percent since Abe came to office in December 2012 with aggressive reflationary policies that have pushed down the yen and spurred a jump in Tokyo stocks.
The panel kept at 1.0 percent its core forecast for "total factor productivity" (TFP) - a key component in the calculations. TFP is a measure of the dynamism of Japan's economy in the long term, seen as a crucial indicator given the shrinking population.
But while keeping the baseline the same, the advisers included more bullish long-term economic assumptions, reflecting the Cabinet Office's rosier economic view.
A 21-person Health Ministry panel, including labour union members, will review Thursday's report and is expected to complete the review by the end of the month. That will form the basis for GPIF to craft its new portfolio allocation strategy.