GPIF hunts for overseas bonds to escape Japan’s low yields

Japan’s Government Pension Investment Fund is rebalancing its $1.4tn portfolio towards foreign bonds to escape rock-bottom domestic yields in a move that breaks with decades of tradition. 

Under its new targets, which will officially go into force from April 1 but have already made their mark on global investment flows, the GPIF will reduce its target holdings of domestic bonds from their current 35 per cent share to 25 per cent. 

Yields on Japanese Government Bonds have been suppressed by negative interest rates and years of bond-buying by the Bank of Japan, which caps the country’s borrowing costs through a strategy known as yield curve control. Japan’s 10-year bond yield has fallen from nearly 2 per cent in 2006 to below 0.2 per cent today. Yields move inversely to price.

The GPIF’s target holdings of foreign bonds — mostly US Treasuries — will meanwhile rise from 15 per cent to 25 per cent of the portfolio. The fund’s holdings of domestic and foreign equities will remain unchanged, with both at 25 per cent. In each asset class, the GPIF will allow itself between 6-8 percentage points of latitude up or down.

The change, which had been widely anticipated, had driven a series of record investment outflows from Japan in recent weeks. 

Takafumi Yamawaki, a rates strategist at investment bank JPMorgan, said the GPIF had likely made most of the reallocation moves into foreign bonds before the official announcement. Other large Japanese public pension funds that mimic the GPIF — which have a collective ¥50tn ($461bn) of assets under management — would now follow suit.

Outflows into foreign bonds from Japanese investors, he said, may continue for some time because of the lack of income on offer at home, including from the ¥120tn held in private pension funds.

Just hours before the portfolio changes were announced, their architect Hiromichi Mizuno, the fund’s chief investment officer, said on Twitter that he would step down from Tuesday and leave the fund altogether. 

He thanked his supporters and said he had spent his five years at the GPIF “exploring what long-term investment for all generations should look like”. A GPIF official said his replacement would be named on Wednesday.

Mr Mizuno has become one of the most prominent figures of the “Abenomics” era, and is widely credited with nudging the country’s corporate sector towards better governance by applying pressure on the asset managers appointed by the GPIF.

His principal influence, according to two of these fund managers, has been to reset global investors’ view of Japan as a market that was changing for the better.

But, according to people close to Mr Mizuno, his approach has also made him unpopular in Japan’s conservative business circles and within the GPIF. He had wanted to leave last summer, said the same people, but had been convinced to stay on because the GPIF had encountered so much difficulty finding a replacement.

Among Mr Mizuno’s most controversial moves was the declaration last December that the GPIF would no longer lend the foreign equities it held to short sellers, arguing that it was necessary to build a healthier investment climate.

The start of Japan’s new financial year, on April 1, will see Masataka Miyazono, the former Norinchukin Bank executive, installed as the head of the GPIF. He will appoint the new CIO.