Giant Japan Pension Warned on Broadcasting Investment Plans

If you were about to ditch $220 billion in fixed income to buy into your domestic market, should you make it public first?

No, that would be “stupid”—at least according to one of the Japanese government’s top pension advisers.

“Saying ‘we’re going to purchase as much as whatever percent’ before buying anything is a stupid idea.”—Takatoshi ItoTakatoshi Ito, a vocal proponent of overhauling Japan’s $1.2 trillion Government Pension Investment Fund (GPIF), has been among those encouraging the giant fund to increase its allocation to domestic equities. But in an interview with Bloomberg this week, he warned against publishing target weightings before making asset allocation changes as the information could move markets before GPIF has a chance to access good prices.

Ito said: “Saying ‘we’re going to purchase as much as whatever percent’ before buying anything is a stupid idea. It’s tantamount to not fulfilling their fiduciary responsibilities and not appropriately investing the money entrusted to them. It’s wrong, and I’m against it.”

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Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank, also hit out at the idea of announcing the allocation changes before acting. He said: “The market will front-run it, and our pension money will be invested at highs. It makes it pointless to entrust our savings to experts, and we should ask for it back so we can manage it ourselves. It makes those experts meaningless.”

The GPIF is currently reviewing its asset allocation, with Prime Minister Shinzo Abe having urged the fund to reach a decision this year. Ito said the fund has probably not started any shift yet, as it would become obvious through market data and filings when the trillions of yen expected to be reallocated start to move.

At the end of June the GPIF had 53.4% in domestic fixed income and 17.3% in Japanese equity. Ito’s personal recommendation, according to Bloomberg, was to slash the fixed income element to 35% of the portfolio and increase Japanese equities to 25%. This would involve the sale of roughly $220 billion in bonds and the purchase of roughly $96 billion in equities, based on the fund’s June 2014 valuation of ¥127 trillion ($1.2 trillion).

Ito has also recommended increasing international equity holdings to 25%, which would require an additional allocation of $108 billion.

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Real interest rates in the UK are forecast to remain negative for 40 years, according to analysis by Andy Haldane, the Bank of England’s (BoE) chief economist.

In a speech yesterday Haldane said the UK’s economy “appears to be writhing in both agony and ecstasy”: While economic growth is improving, inflation is low, and employment is rising, at the same time real wages are falling, productivity is stagnant productivity, and real interest rates are near zero.

Haldane said that “five-year real interest rates expected in five years’ time have fallen by over 100 basis points” in the UK, the Eurozone, and the US. This was likely caused by repeated “downside surprises” as expected recoveries in certain data measurements failed to materialise.

This had resulted in “truly extraordinary” forecasts, he said—as illustrated by the chart below.

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Haldane said the BoE’s rate-setting Monetary Policy Committee “has been forecasting sunshine tomorrow in every year since 2008”, with real wages, productivity, and real interest rates all expected to rise but with few (if any) increases materialising. The International Monetary Fund also repeatedly overshot in its predictions, he added.

Haldane rates Source: Bank of EnglandThe UK’s base interest rate has been 0.5% for more than five years, while the US Federal Reserve and the European Central Bank have also kept rates at record low levels for similar periods. As the Fed reduces its quantitative easing programme, expected to end this month, investor attention has turned to when central banks will begin tightening monetary policy by raising rates—and by how much.

Haldane said the 40-year negative rate forecast may reflect a shift towards safe haven assets by investors spooked by recent geo-political tensions.

“The implications for future growth might then be relatively benign, either because these risks are short-lived or because they do not affect companies’ investment plans,” he said. “In other words, the pattern of real rates might still be consistent with a recovery.”

However, he also warned of “an alternative hypothesis” that the forecasts “reflect pessimistic expectations about future growth prospects”, which would require base rates to remain lower for much longer than is expected by any central bank analyst.

“This would carry more far-reaching and negative implications for the economy, more in line with the secular stagnation hypothesis,” Haldane said. Rising inequality, falling educational standards, rising debt, and high youth unemployment all play into this hypothesis, he added.

“Recent evidence, in the UK and globally, has shifted my probability distribution towards the lower tail. Put in rather plainer English, I am gloomier,” Haldane said. “That reflects the mark-down in global growth, heightened geo-political and financial risks and the weak pipeline of inflationary pressures from wages internally and commodity prices externally. Taken together, this implies interest rates could remain lower for longer, certainly than I had expected three months ago, without endangering the [BoE’s 2%] inflation target.”

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