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Japan public funds to adopt new stock index, invest in inflation-linked bonds
April 8, 2014 / 5:11 AM / 3 years ago

Japan public funds to adopt new stock index, invest in inflation-linked bonds

A man rides a bicycle past electronic boards showing the figures and graphs of recent fluctuations of Japan's Nikkei average (L), the U.S. NASDAQ average (2nd L), the Japanese yen's exchange rate against the U.S. dollar (C), Japanese yen's exchange rate against the euro (2nd R) and Japan's 10 year government bonds, outside a brokerage in Tokyo February 20, 2014. REUTERS/Yuya Shino

TOKYO (Reuters) - Japan’s three public funds, which collectively hold $296 billion in assets, are planning to invest in inflation-linked Japanese government bonds and adopt a new domestic stock index that focuses on return on equity aimed at generating higher returns.

The move follows a recent series of changes in investment strategies by the $1.26 trillion Government Pension Investment Fund (GPIF) and pressure from Prime Minster Shinzo Abe’s government to diversify investments and rely less on low-yielding domestic bonds.

The three public funds -- Pension Fund Association for Local Government Officials, the Promotion and Mutual Aid Corporation for Private Schools of Japan, and the Federation of National Public Service Personnel Mutual Aid Association -- will be required to manage their funds under the same asset allocation weightings with GPIF from October 2015.

On Friday, GPIF said it had started allocating funds into the JPX 400 index, which focuses on ROE and corporate governance, but only in small amounts so far.

All three funds said they would begin investing in inflation linked JGBs as GPIF had started investing in them last week.

The federation for civil servants, known as KKR and holds assets of 7.8 trillion yen, and Pension Fund Association, which holds 19.1 trillion yen, will adopt the JPX 400 index as a benchmark in its passive domestic equity investments.

The public fund for private schools, which holds assets of 3.8 trillion yen, will use Russell Nomura Prime index as a benchmark and consider using other indexes.

Japanese public funds are required to generate higher returns to cope with pension payouts for the country’s rapidly ageing population.

GPIF made its biggest asset allocation shift since its birth in 2001 in June and is reviewing its allocation strategy to consider further increasing its target for stocks while lowering the bond weighting.

The federation in December lowered allocations to Japanese bonds and raised weightings to domestic equities.

The public fund for local governments slightly revised its investment strategy in December by allowing the range of allocation in domestic bonds to deviate by 10 percentage points from the core weighting of 64 percent, wider than the previous 5 points.

($1 = 103.1250 Japanese Yen)

Reporting by Chikafumi Hodo; Editing by Jacqueline Wong

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