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MitonOptimal Weekly Comment - Week 44, 2014This morning a Japanese government official announced that Japan’s public pension fund will change its asset allocations. The Government Pension Investment Fund (“GPIF”) is 127.3 trillion Yen in size (USD 1.2 trillion) which is very large and, according to Bloomberg, is roughly equal in scale to the Mexican economy. For many years we have chatted to Japanese fund managers, who have bemoaned the GPIF’s single digit asset allocation to local equity and had expressed hopes of even a target 12.5% domestic equity weighting. According to reports, this is now to be increased to 25%, along with another 25% to global equity.

Simultaneously, the Bank of Japan (“BoJ”) announced it would increase its current QE programme by expanding the Japanese monetary base by 80 trillion Yen (USD 720bn) a year from the previous 60-70 trillion Yen. BoJ Governor Haruhiko Kuroda surprised all but 3 of 32 economists surveyed by Bloomberg (that’s no surprise!) by stating it will purchase government bonds, exchange traded funds and REITs in much larger quantities than previously. The Yen immediately slid to 111.3 against the USD and the Nikkei stock index bounced just under 5%.

MitonOptimal Weekly Comment chart - Week 44, 2014

In what is already large stimulus, this is unprecedented from the BoJ and it is no wonder it sent stocks soaring and the Yen tumbling. After roughly 20 years of a bear market in Japanese equities (see chart) this liquidity may prove a pivotal turning point.

The GPIF’s moves are also very significant and an important event for Japanese government bonds. The current portfolio targeted 60% bonds and this is to reduce to 40%. The Fund had become too reliant on government bonds and its buying has contributed to the very low yields available for many years. A mere 25 trillion yen (USD 220 billion), over the coming months and years, will have to affect yield and therefore bond prices of JGB’s.

As the US exits QE, Japan puts the foot down hard on additional QE. It is now up to the European Central Bank to show that, whilst it talks a good game, it also needs to do what is required.

1422375203wpdm_Weekly comment Week 44 2014 - How big is Japan_s GPIF - SC .pdf


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