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Awakening Japan's Sleeping Giant?
Submitted by Leo Kolivakis, publisher of Pension Pulse.
Chikafumi Hodo of Reuters reports that Japan's public pension fund urged to seek higher returns:
A
Japanese government minister on Friday urged the country's massive
public pension fund to seek higher returns, ramping up pressure on the
traditionally conservative investment portfolio to take more risk.
The
size of the $1.36 trillion public pension fund, the world's largest, is
greater than the 2008 gross domestic products of countries including
Australia, India and Mexico, and is almost seven times bigger than top
U.S. pension fund CalPERS.
Internal Affairs Minister Kazuhiro Haraguchi told reporters at a news
conference after a health ministry panel meeting that the Government
Pension Investment Fund (GPIF) should seek greater returns than it has
generated in the last few years.
He urged a review of the fund's performance after the rate of return on
its investments fell to minus 10.3 percent, or a record loss of 9.7
trillion yen ($108 billion), in the financial year that ended in March
2009.
The
GPIF has boasted that its conservative strategy, under which nearly 70
percent of its assets are held in Japanese government bonds, helped
limit its losses compared to foreign pension funds that year.
Haraguchi declined to comment on how the GPIF should set up its portfolio, however, as his views could impact markets.
The internal minister also said there should be a review of whether it
is appropriate for a lone person, the GPIF president, to give the final
approval for the fund's asset allocation and also whether a single body
should manage such an enormous fund.
"We need to verify whether it is appropriate for only one organisation
to manage such a huge fund of more than 120 trillion yen," Haraguchi
said.
But Health Minister Akira Nagatsuma, who supervises the fund, said it should stick to safe investments.
Nagatsuma said in a speech at the meeting that the U.S. public pension
fund is even more conservative than the GPIF as it only invests in
Treasury bonds.
Haraguchi's
internal affairs ministry oversees the country's independent
administrative institutions, or semi-government agencies, such as the
GPIF.
MASSIVE PORTFOLIO
The GPIF manages its fund in line with a model portfolio, which is
reviewed every five years based on a return target given by the health
ministry.
The health ministry
panel is currently drawing up a new investment target, which is
scheduled to be given to the public fund in February or March, a health
ministry official said.
The GPIF is set to manage their funds under the new model portfolio from April.
Domestic bonds currently make up 67 percent of the public fund's
portfolio, domestic stocks comprise 11 percent, foreign stocks 9
percent and foreign bonds 8 percent.
Analysts said the GPIF's portfolio is too big for a drastic allocation
change, but that there is a need for the public fund to be more
transparent.
The current
procedure for determining asset allocation involves both the health
ministry and the GPIF, making it difficult to pinpoint who is
responsible for its performance, analysts said.
"Its portfolio is so enormous that any changes in its investment
strategy could move markets, so it is understandable that there is an
argument for restructuring," said Takahiro Tsuchiya, a strategist at
the Daiwa Institute of Research.
"But whether such a move is possible is open to question as it would cost a lot," Tsuchiya continued.
My
advice to Japanese authorities is to break up this giant fund and set
up a more diversified asset allocation with tight governance rules that
limit the downside risk. If you invest in hedge funds, set up managed
accounts where you can pull the plug at any time. There are a few
knowledgeable advisors you can work with to set this up. If you
diversify into private equity and real estate, be careful and once
again, choose your partners wisely.
What will an asset allocation move from Japan's sleeping giant mean for
the markets? Probably nothing in the near term, but over the longer
term, this will add to the liquidity tsunami and direct investments
into stocks, hedge funds, private equity funds can potentially impact
markets in a profound way.
»
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Lets get real here ,Japan is still to some extent a vassal state of the US and it will do what the FED tells them to do
Japan will not grow until it has a independent foreign policy and it bans the carry trade in its currency which is chiefly responsible for global investment bubbles over the years.That will require global or even more likely national capital controls which will make our conversation redundant
That being said equities are strange investment beasts and they can do well even if the surrounding environment is hostile once of course most of the buyers have capitulated
nice piece, Leo. thank you for it.
Leo,
Before we all gasp at the stated size of this fund, we should remind ourselves how Japanese accounting works in regard to pensions. It's a little bizarre. I'll explain.
Managers of pension money have a contractually agreed-upon rate of return. Nothing unusual there. Japan, however, has a unique way of calculating this gain, and this unique way leads to all sorts of problems.
The contractual payout can only be made from realized gains. All realized gains must be offset by any realized losses. Unrealized gains cannot be paid out, and unrealized losses can be ignored.
What happens is that winners are sold (or crossed to realize the "gain"), and losers are retained. Over time, the cost basis creeps higher (gains realized, then put back on at the new "entry" price), and the pile of losers, aka dead money, grows and grows. After a decade or two---especially given the Nikkei/TOPIX two decade performance---the stock portion of the portfolio is massively underwater, though the supposed value of the pension fund is not adjusted to reflect this fact. As for the fixed income side of the fund, over time it takes on "top tick" appearance, as the gains have been realized to make the contractual payout, and the position put back on at the new (higher) price. This makes pensions especially vulnerable to a rise in rates. In fact, for Japan, a rate rise would be devastating.
Just how devastating? All the pensions are underwater, especially from an equity perspective. All of the bond side WILL be underwater if rates rise. Add in the fact that the government itself now pays out 35% of all tax revenues just to service JGB debt, and would be paying out 100% of total revenues if rates rise 200 pips, and you have the makings of a disaster. Oh yes, with rates at almost zero for more than ten years, and an aging population that now needs to dip into principal to cover life's cost, Japan's saving rate (17% in 1989) may well turn negative in 2010.
This is not a sleeping giant; it is a time bomb with the fuse already lit.
You're correct about the savings rate dropping. Two generations ago, the Japanese bought into the concept of overpopulation so they limited family size and today they are paying a high price for it, not just in economic terms but socially and culturally as well. They have bought into AGW now and have set policies that will further harm their economy even though the wind still blows from the southwest across the Sea of Japan spreading all of China's pollution onto the islands. They will see little benefit from those policies in real reduction of emissions.
Meanwhile, the creep of Western culture has infected the younger generations of Japanese so that issues like obesity and other health-related problems, destruction of the family traditions, and liberal fiscal policies, like credit, will further erode their culture and well-being.
Now, those that have led the rest of the world into moral and economic bankruptcy want to lecture them on how best to handle their finances and, while we're at it, insist that they open their country up for foreign business opportunity.
Perhaps their best move would be to ignore the well-meaning concern of the rest of the world and figure it out on their own.
"The creep of Western culture".
I'll grant you Macudonnarudo (McDonalds), but the rest of the decline in Japanese (and Asian) culture is completely home grown. It is this lack of acceptance for responsibility (I'm 25 years in Asia) that I see as one of the "East's" great failings. The West might lecture, but the East not only does its own share of lecturing (Mohammed Mahathir, Shintaro Ishihara) but always tries to lay blame elsewhere.
In Japan, I can hire a pretend family, complete with fake grandchildren, to come and role play with me in my Golden Years (all because my own real offspring have no interest in visiting). If I'd rather play golf during O Bon, I can hire people to go greet my ancestors' graves and lay flowers. My best friends can be robots or anime characters, and my pet can be a little electronic toy. Like many Japanese salarymen, I anxiously await Wednesday's issuance of new Manga, so I can read (on the subway) tales of middle age salarymen shtupping thirteen year old school girls in uniform, and I can join a phone club (tere kuru) to dally with high school girls who want a few extra "man" (10000 yen notes) so they can buy a fancy bag or some new shoes. I can also buy used schoolgirl panties out of a vending machine, or play "scissors, paper, stone" with other customers at a girlie show to see who goes on stage to shtupp the performer in full view of the other customers. And if I am a neglected Japanese housewife, I can call a number off a flyer stuffed in my mailbox so that a young stud will visit me while hubby is at work and scratch my itch. I could go on, and not only in Japan. Second wives? Every country has a word in its vocabulary, and among the wealthy it is not only a status symbol, but expected. Oh, and nobody on the face of the Earth, and I mean nobody, can hold a candle to Hong Kong'ese materialism and worship of money. Wealth is admired no matter the source (business or graft or drug running), and power respected no matter how it was gained.
Nobody in the West taught this to anybody. Maybe it all works in Asia, but to lecture the West on morality is the height of hypocrisy. Ain't nobody without sin.
Well, you have certainly given the stereotypical gaijin understanding of the Japanese culture. Let me guess, your favorite hangout is a hostess bar in Roppongi. Of course, all of these things you rattle off can be found in nearly every major city in the world with local variations. But, what's your point? Are you claiming to have spent those 25 years there and not found anything enriching about the culture? Why stay if it's so bad?
"Stereotypical gaijin understanding of Japanese culture", as opposed to what? A sterotypical gaijin sycophant's view of Japanese culture? (Incidentally, I happen to be fluent in four Asian languages, and understanding the nuances of a people's language is a great way to understanding the mindset and culture.)
Your original post laid the blame for any negativity in Asia on the corrupting influence of "Western decadence", which is the same tired shiboleth the likes of Mahathir and Ishihara (two men possessed of a powerful inferiority complex) parade out periodically to try to curry favor with those of like mind or to try to make themselves feel better. It is bullshit, and only those blind to the "mysteries of the inscrutable East" are susceptible to its lure. I suspect you are one of them.
My point is Asia's decadence is home grown, just as is the Wests. The West is not all bad, the East is not Shangri-La, and vice versa. "All the things you rattle off can be found in nearly every major city in the world." Exactly. Now you admit it.
Note that I do not go so far as Kurosawa, one of his famous quotes being, "What culture? I INVENTED Japanese culture." Possessed of a keen appreciation of his own society, Kurosawa was aware that Japan is often driven by things like ritual for the sake of ritual, where style is far more important than substance, especially if we all agree on it.
In your original post you actually attributed the state of today's Japanese youth on some negative Western influence, which is complete nonsense. Had you both lived in Japan through the Bubble Economy and its collapse, plus kept your eyes open, you would have a far better understanding of what is the true cause of the current state of Japanese youth. You would know it has everything to do with Japanese culture and nothing to do with the West.
Finally, as for Roppongi (or Ginza or Akasaka) hostess bars, as you know in most gaijin are not permitted, just as on Thaniya Street in Bangkok, home to a hundred hostess bars stuffed with young and underage Thai country girls, only Japanese are allowed. Somehow I suspect that is the "decadent West"'s fault, too.
Actually, I laid the blame on the forced efforts of population control. I'll go further and point to their bureaucratic form of government and a people willing to be governed in a manner as to allow such infringement of freedoms. It weakened them socially and economically as they are now beginning to understand. Futhermore, it opened them up for greater influence from outside....my "creep of Western culture", which for them, is a cultural problem. You can agree or disagree as you choose.
I do not argue that they are pure little angels or that they embody the essence of Shang-ri-la. But they are culturally a closed society and by choice. My point is that, whatever one thinks of their society, it's none of your business or mine. And I appreciate your last comment and hardly argue with it. They are responsible for whatever happens to their country. My problem with your previous post was your laundry list of extremes as a way of describing the culture. It would be the same as saying that Paris and Perez Hilton are the embodiment of the American culture.
And they are well aware that the outside sees them in the way you describe which is why, among other issues, it is difficult for them to accept the immigration that they are now forced to accept in order to feed the needs of their economy.
It seems that the ex-pats are the ones that have the biggest problems with the way Japanese live their lives. In my mind, it is the same as wanting to change the furniture in a home in which you are a guest.
http://www.businessweek.com/news/2010-01-20/japan-is-best-investment-ide...
I am sure someone is trying to sell good old U.S. mortgage backed securities to the GPIF. "for you my friend, special price".
Japan, beware all of these experts out there trying to give you their great advice. What they see is $1.36 trillion dollars and they wonder how to get some of it.
Yes suteibu I believe the wall street crooks tried to gain control of the Japanese postal bank but was successfully resisted by elements within the Japanese establishment
Duh...
everyone has been wondering why Japanese government rates are so lo given their fiscal deficits and poor credit...
they're jamming the pensioners with bad government paper
More risk...I think they can smell the hype too.
better check the correlation before jumping Japan: http://stockcharts.com/h-sc/ui?s=EWJ&p=D&yr=3&mn=0&dy=0&id=p36672316725
Also re Japan, though a bit OT from your post re Japanese pensions, is that a lot of industrial products (like bearings) are still cheap vs. US and European products.
Back on topic, Japanese stocks could indeed be a buy if their pension system does loosen up and allows purchases of Japanese stocks.
Finally, Japanese stocks as an investment is thoroughly hated by "everyone" (because of the 20 year decline) so could be a great contrarian play. I am going to look into this at some point.
Bill Bonner (of Daily Reckoning & Agora publishing fame) has declared his new "Trade of the Decade".
In 2000, he said: "Buy gold, sell the Dow". That worked out very well. Dow down, gold up better than 3x.
While he still likes gold, he has a new (2010 - 2020) Trade of the Decade: "Buy Japanese stocks, sell US Treasuries". He did say that this trade may be rockier than his first. But, his call WAS very good back in 2000.
"My advice to Japanese authorities"
LOL
that's what japan needs, to give goldman a chance to trade against their public pension fundon top of an historic deflation. genius. sounds to me like that would be the final indication that the cyclical bull in this secular bear is in place.