GPIF Worried About Japan's Public Debt?

Leo Kolivakis's picture

Via Pension Pulse.

Chikafumi Hodo and Hiroyasu Hoshi of Reuters report, Japan's giant pension fund warns on nation's debt:

$1.4 trillion Government Pension Investment Fund (GPIF), the world's
largest pension fund, warned the country needs to resolve its debt
problems, although, for now, it is sticking to its basic investment


Chairman Takahiro Mitani said in an interview with Reuters that
Japan's bulging public debt -- the largest among developed countries at
double the size of its $5 trillion economy -- would reach a crucial
point in five to 10 years if the problem is not resolved.


GPIF, whose asset size is larger than both the Canadian and Indian
economies, is a major force in the Japanese government bonds (JGB)
market, where it parks two-thirds of its assets.


GPIF plans to diversify its portfolio, however, by investing in
emerging markets, where its hopes to start channeling funds in the
financial year that starts in April.


are not thinking of changing our basic portfolio as a result of
ratings changes by credit rating companies," Mitani said on Wednesday.


Investors Service changed the outlook on Japan's Aa2 sovereign rating
to negative from stable on Tuesday, warning that government policies
may be insufficient to rein in the country's huge public debt.


That warning followed Standard & Poor's downgrade of its rating on JGBs last month, its first such cut in nine years.




markets showed a muted reaction to Moody's action on the view that
high domestic savings will provide ample funding for the government for


don't think investors are making investment decisions based on credit
rating companies' actions. Rather, they are watching overall fund flows
into JGBs to make their decisions," Mitani said.


it is important for the Japanese government to resolve its fiscal
problems, Mitani said, adding that he shared the credit rating firms'
views that the country cannot leave the debt situation as it is. He did
not elaborate.


The GPIF, which
invests the reserves of national and corporate pension plans, held total
assets of 117.6 trillion yen as of September.


performance in the six-month period to September was a negative 1.5
percent, compared with a positive 7.91 percent for the whole financial
year that ended last March.


fund's performance up until September lagged other major overseas
counterparts, such as California Public Employees' Retirement System
(Calpers) which posted a positive return of 3 percent, while the Canada
Pension Plan Investment Board produced a bigger return of plus 5.2


Besides Japanese government bonds, the fund also has exposure to domestic shares, foreign bonds and foreign equities.




Mitani said the GPIF was in no hurry to move into emerging equity markets, which have recently lost steam.


tender to pick fund managers for GPIF's emerging market equities
investments closed in December and it has completed its first round of
screening, he said.


He expected the entire selection process could take about one year as the fund received a large volume of applications.


fund decided to take on exposure to emerging markets as they are
growing rapidly and offered great potential for future growth, he added.


"We don't have to rush in now as emerging market (equities prices) are in a corrective phase," he said.


"We want to take more time and we want to be more selective in choosing managers."


Mitani said the fund's investments in emerging markets would be gradual and the initial amount would be small.


The GPIF will use the MSCI main emerging market stock index .MSCIEF as its benchmark.


As of September, about more than 9 percent of the GPIF's total assets were in foreign equities.

Mr. Mitani is looking for a serious correction before plowing billions of dollars in emerging markets (EM). I don't know
but I can introduce GPIF to a very experienced emerging markets manager I
know here in Montreal who will be glad to consult them for a fraction
of the cost they're going to be paying these EM managers they're
currently reviewing.

Back to the topic in the article. Kip McDaniel of aiCIO reports, Japan's GPIF Calls on Gov't to Rein in Mounting Public Debt:

Chairman Takahiro Mitani of Japan's $1.4 trillion Government Pension Investment Fund (GPIF), the world’s largest and thus first on aiGlobal 500 listing of the world's largest asset owners, has called on the government to help rescue the nation from its growing debt before it reaches a critical point.


are not thinking of changing our basic portfolio as a result of
ratings changes by credit rating companies," Mitani told Reuters,
noting that the fund aims to diversify its portfolio by increasingly
investing in emerging markets. In the six month period to September,
the performance of GPIF, which has an asset size larger than both the
Canadian and Indian economies, was negative 1.5%, compared with a
positive 7.91% for the entire financial year that ended last March.


statements by Mitani over Japan's burgeoning public debt, amounting to
double the size of its $5 trillion economy, follows the decision by
Moody's Investors Service to change the outlook on Japan's Aa2
sovereign rating to negative from stable. It also comes about a month
after Standard & Poor’s downgraded the government’s sovereign debt
rating, with both Moody's and the S&P asserting long-term fiscal
unsustainability of the country's debt.


Late last year, the fund came under fire
from an Organization for Economic Co-operation and Development (OECD)
report. The report, focusing on both governance and investment strategy
issues at the GPIF, followed a set of 2006 reforms at the fund. “While
much improved,” the report states, referring to previous reforms, “the
new governance structure still falls short of international best
practices and in some aspects does not meet some of the basic criteria
contained in OECD recommendations.”


the report’s complaints relating to governance, the GPIF still is not
required to put its investment policy in writing, and there remains
uncertainty surrounding the issue of whether the fund’s Board sets – or
simply recommends – the investment policy. Also concerning to the OECD
was the fact that the responsibilities of Chairman of the Board, Chief
Executive Officer, and Chief Investment Officer all coalesce in one
man – currently Takahiro Mitani. “The lack of a clear separation
between operational and oversight roles within the fund is a major
problem that goes against OECD recommendations,” the report stated
before recommending that the roles be distinct. Furthermore, the report
asserted, a more robust staff should be hired.

a stickler for pension governance and believe in transparency, so I
don't understand why GPIF's investment policy isn't made public. But
when you're the biggest fund in the world, you don't want to start
telegraphing your moves in advance. In fact, you can argue that GPIF is
too big and needs to be cut into several large funds (Mr. Mitani rejects such proposals).
A senior pension fund manager told me that ABP, the large Dutch pension
fund, is struggling with economies of scale due to its size. It's not
easy for these mega-funds to deliver returns once they cross a certain
asset threshold (I've seen this with hedge funds).

As for Mr. Mitani's influence, I believe that it's crucial to segregate
senior functions. The President & CEO of a pension fund doesn't have
time to be the Chief Investment Officer. I've seen it firsthand and
think it's too much responsibility for one person to handle. You want
your CIO to be dedicated full-time to investments. Presidents & CEOs
have to handle the board and stakeholders on top of heading the fund,
leaving them little time to follow markets closely and make tactical investment decisions.

There is little doubt
that Mr. Mitani is one of Japan's most powerful men. If he's expressing
concern over Japan's mounting public debt, it's because he's worried
about what the future holds. There are legions of hedge fund managers
salivating at the thought of making a fortune shorting JGBs. Most of them have been slaughtered over the years and will continue getting slaughtered betting against JGBs.

In November 2009, Richard Katz, editor of the Oriental Economist Alert, wrote an op-ed in the WSJ, Now Is Not the Time to Fret About Tokyo's Debts. I quote the following:

hawks assert that the Bank of Japan will soon lose its ability to keep
rates low, arguing that the struggle between the government and
private borrowers for limited funds will send interest rates skyward.


evidence says the opposite: There is no crowding out. The government
has not even borrowed enough to offset the decline in private
borrowing. Corporate net debt peaked at 117% of GDP in 1990. By 2007,
corporations seeking to shed nonperforming loans had reduced their debt
to 70% of GDP. Household gross debt, meanwhile, fell to 70% of GDP in
2007 from 82% of GDP in 1999. As a result, the total combined private
and government debt peaked in 2000 at 276% of GDP, and has since
declined to 244% as of 2007, the latest data available.


is there any lack of buyers for new government bonds, 95% of which are
held by domestic investors. The banks need to buy this paper to offset
the decline in their core lending business. From 1998 through 2009,
outstanding bank deposits rose 17% but bank loans fell 13%. How could
the banks pay interest to their depositors unless they bought bonds to
earn interest?


The real danger
from Japan's debt buildup is not a potential crisis in the
government-bond market but corrosion in the real economy. The Bank of
Japan will retain both the need and the ability to keep long-term rates
very low for the foreseeable future. But this method of avoiding
fiscal crisis causes enormous collateral damage.


lowering the hurdle rate for investment, this action leads firms to
pour capital into wasteful projects that temporarily boost demand but
end up hurting long-term growth. Consider this decade's binge in new
supermarkets, even though total supermarket sales have been flat for
years. Then there are all the "zombie" firms kept in business by very
low interest rates; 20% of bank loans charge less than 1% interest
while 5% charge less than 0.5%.


has been here before. In 1997, a similar debt scare led Prime Minster
Ryutaro Hashimoto to raise consumption taxes, plunging the country into
deep recession. In 2003, similar panicky storylines spooked the
markets. It's easy to see why investors are having déjà vu; Tokyo today
is headed toward a budget deficit that's 10% of GDP, and the ratio of
outstanding government debt to GDP has hit a record high.


is certainly a deficit addict. Ever since the mid-1970s, a structural
shortfall in private domestic demand has compelled the government to
sustain decade after decade of deficit spending to make up for that
shortfall. Japan's new government says it wants to solve that problem
by using government money to raise household disposable income. Yet,
fearing today's deficits, policy makers are waffling on that program.
Virtually every day various ministers come out with a new and
conflicting message on fiscal policy.


Japan's top fiscal priority
today should be to use large budget deficits—spent on the right
things, such as child care allowances, free high school tuition,
connecting suburban houses to sewage lines and consumer-oriented tax
cuts—to ensure recovery. With many economists anticipating economic
softness in the first half of 2010, perhaps even a quarter of negative
growth, this is hardly the time for premature withdrawal. Once recovery
is in place, that's the time to address the deficit and, more
importantly, its underlying causes.

Even though that
article was written over a year ago, it's worth keeping in mind that
Japan's net debt profile isn't as bad as doomsayers portray it to be.
More recently, Lindsay Whipp of the FT reports, Japan’s debt gives investors unlikely opening:

The distant chimes of alarm bells are going off about Japan again.


Just a month after Standard & Poor’s downgraded the government’s sovereign debt rating,
Moody’s on Tuesday warned that it might follow suit, both agencies
citing long-term fiscal unsustainability of its growing debt pile.


political deadlock that could delay the passing of budget-related
bills and progress on comprehensive tax reform to pay for rising
welfare costs is certainly not helping confidence.


Tom Byrne,
Moody’s senior vice-president, said that his view “takes into account
intensifying political challenges facing the [Naoto] Kan government,
which may heighten policy formulation and execution risks”.


Domestic investors, which make up 95 per cent of the Japanese government bond market, are watching developments closely.


they do not envisage a worst-case scenario, whereby the government
will be unable to issue a huge mountain of refinancing bonds, and they
certainly do not expect a bond and currency crisis in the medium term,
the opacity of the current political turmoil is creating confusion.


seems to be more skewed towards the downside on domestic investors’
confidence on the political will for fiscal austerity,” says Tomoya
Masanao, a Tokyo-based portfolio manager for Pimco.


“This means I should remain cautious about the JGB market. But we are not in the camp that JGBs are going to blow up because of the fiscal situation.”


long-term sustainability of Japan’s growing debt pile is a touchy
subject that has oftendivided domestic and overseas investors. Mistiming
a JGB bond and yen crisis or expectations for a spike in yields have
caused numerous foreign investors pain. But that has not stopped some
placing a small chunk of their assets on a bet that, as Tokyo’s fiscal
stability deteriorates in the future, there are huge gains to be made.


Kyle Bass of Hayman Capital Management, a well-known JGB bear, this
month reminded his investors of a looming bond market crisis in Japan.


are well versed in the numbers and they are not pretty. To name a
couple, Japan’s gross debt is set to grow to more than twice the size of
the economy this year. Its debt burden is estimated to reach
Y997,700bn by the end of March 2012. In addition, new bond issuance is
set to exceed tax revenues for the third year running in the fiscal
year 2011.


But Tokyo can rely on the
huge pool of domestic funds to buy up JGBs for now, particularly as
there are few other options for investors in yen. Public and private
institutions’ capacity for soaking up JGBs minimises the government’s
funding costs.


Benchmark 10-year yields may have risen nearly 50
per cent since the beginning of October to 1.27 per cent, in line with
gains in US Treasury yields, but they still remain the world’s lowest.


there have been signs of movement out of JGBs from the public sector.
Japan Post Bank’s outstanding JGB holdings dropped Y6,167bn to
Y149,724bn between March and December, amid an increase of just over
Y2,000bn in its holdings of dollar- and euro-denominated assets. There
is a chance this is just an asset allocation adjustment but the buying
fits with a call from Shizuka Kamei, a former minister in charge of the
post office, to diversify funds.

public pension funds were also net sellers of bonds for the first time
in almost a decade last year amid deteriorating demographics, and that
trend is only likely to continue. But for now, the bond market has
shrugged its shoulders at the shift, partly because it remains

The most important investors last year were
commercial banks, as corporate savings have made up for a slowdown in
household savings rates. Signs of an improving economy have raised
expectations for increased investment by companies using those savings,
but one official at a Japanese megabank says that this is not

“Even if Japanese companies’ profits have been good,
it does not mean that the domestic economy is improving, because the
growth is coming from external demand,” the official said. “I am not
seeing a trend of yen-denominated corporate deposits being withdrawn or
loan volume picking up,” he says.

agree. Pimco’s Mr Masanao adds that corporate savings are not a
temporary phenomenon because the slower growth and deteriorating
demographics suggests that companies need to invest less.

“There may be some capital leakage overseas by large corporations, but it’s still a micro story more than a macro one,” he said.

theme of falling investment is important when estimating the point at
which Japan’s current account surplus could shift into deficit, a key
moment for the JGB market, according to Société Générale.

for when that might happen vary widely, but SocGen says that it is
possible that Japan could maintain its surplus for “decades to come”. It
points out that despite the drop in the household savings rate the
current account surplus appears to be on a rising trend over the past
two decades, apart from the sharp drop during the financial crisis.

alarm bells of Japan’s fiscal sustainability may still be distant but
that does not mean domestic investors are happy with Japan’s fiscal
situation. Ultimately, in the event of a debt and currency crisis,
policymakers may be forced to step in and support the market.

continuing to enjoy a current account surplus does not necessarily
mean the government can keep its high debt forever,” says Takuji Okubo,
an economist at SocGen. “The more relevant concern . . . is whether
the current strong home-bias of Japanese households would subside.”

“The Bank of Japan and Ministry of Finance need to have a sense of crisis,” says the official at the large Japanese bank.

Japan's trade balance swung into a deficit for the first time in almost
two years as shipments to China lost steam, but economists say the
central bank's forecast for an export-led recovery remains intact. We'll see how geopolitical events and rising crude prices impact their economy in the second half of the year.

Longer-term, demographic trends
will put pressure on Japan's public debt. But Japanese policymakers
have ample time to start thinking about how they're going to tackle this
issue. Mr. Mitani has sounded the alarm, but I'm not sure anyone is
paying attention, at least not yet.

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LawsofPhysics's picture

extend, pretend, extend, pretend...  the mantra continues.  Transparency is non-exsistent in any of this because of "mark to unicorn" accounting.

ZackAttack's picture

We are Japan, with a 10 year lag.

RockyRacoon's picture

I tend to agree, but with a shorter time frame.

With many economists anticipating economic softness in the first half of 2010, perhaps even a quarter of negative growth, this is hardly the time for premature withdrawal.

We will be hearing more and more of the same rhetoric in the U. S.

And I'm not even going to go to the obvious sexual imagery.

Weisbrot's picture

why worry, they can go on the dollar standard like zimbabwe did

falak pema's picture

It's mind boggling... who is NOT printing trillions these days. Even Khaddafi is printing oil checks to mercenaries.

I think i'm going to hang on to my family's silver candelabra after all...

honestann's picture

The setting sun.

gwar5's picture

He should just BTFD.

Seer's picture

TBTS - Too Big To Succeed  eventually there won't be enough growth to suck off of and all these pension funds will go belly up.

Zero Govt's picture

+1  ...this pension plan should be sliced into 100's of smaller operations to reduce systemic risk and improve performance. The size of this big slow dinosaur is a huge, single structure risk and seed for its downfall... but Mr Mitani thinks his fund size shouldn't be split (despite its under performance) but calls out systemic risk in Govt finances, another big diseased dinosaur problem no less?!! 

PulauHantu29's picture

Listen to the latest Kyle Bass interview posted a few days ago here, on Zero Hedge.

Japan is in Big Trouble and printing trillions of (more) yen will just make it worse according to Mr Bass.

Dirtt's picture

"I'm a stickler for pension governance and believe in transparency, so I don't understand why GPIF's investment policy isn't made public."

Elementary Watson.  They are fucking LIARS.

This will end badly.  The oligarchs children and grandchildren have an ugly future to live.   The question is where can they hide. Plenty of places are set in stone.  Living behind stone walls is what kind of future?

Malfeasance of biblical proportions in the end has always had an end game. I'm chillin' in paradise. Growing my food.  All is good.

suteibu's picture

All of these people are scaring the public to help the Keidanren and the Kan administration sell its "open Japan" scheme which includes joining the Trans-Pacific Partnership free trade agreement (the Obama admin is hot after this as well, what with Japan's households knowing nothing about a US-style FIRE economy and holding ~$14 trillion in assets ripe for the picking) and raising the consumption tax to in stages (first 10% then 15%, capping at somewhere around 22% according to the Keidanren)

Everybody that stands to gain from free trade and tax hikes is pushing this same meme.

knukles's picture

Sung to the tune of; "I'll be with you at seppuku time."

Yancey Ward's picture

Guess GPIF is finally understanding that the only people who can pay off on those bonds they hold are the Japanese saving in the plan.  I wonder when the pensioners themselves realize it.

fx's picture

The guy gives japan another 5-10 years? When someone in his position says so, you bet he knows darn well the countdown is already much shorter than 5-10 years.

The author's notion that the new trend of net-outflows (demographics) didn't matter because "it remains incremental" is a funny one. How about the "incremental" jump in indebtedness each year due to outsized fiscal deficits?

The collapse of Japan's public finances may still be a few years away, but it is one of the surest things out there - the govt has little room to extend and pretend. the markets will react and anticipate "day x" well in advance. Once they do it, boy, will it shake the very foundations of the global financial markets! Anybody who is NOT preparing for that pretty soon, will get killed by that tsunami. And of course, you will then hear and read "nobody could have foreseen it was coming so soon" aplenty.