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Pension Money Already Flowing In To Prop Up Japan's Stocks

Tyler Durden's picture




 

With almost metronomic regularity, Japan will gush forth a headline proclaiming the ever-closer time when all the nation's retirees savings will be greatly rotated to the stock market and away from the nation's largest bond market in the world. This week was no exception; however, as Nikkei Asian Review reports, it appears the "all-talk" has turned to action...The Government Pension Investment Fund and other public pensions sold about 1.8 trillion yen ($17.4 billion) more in Japanese government bonds than they bought in the first three months of the year, fueling speculation that the GPIF may be rebalancing its portfolio sooner than expected. It seems rotating away from government bonds (which the GPIF has been worried about since 2011) into junk bonds and junk stocks is a far better use of 'wealth' - we can only imagine the GPIF risk models just got switch to '11'. As we explained last year, Japan's Plan B is not only not a panacea, but it is a House of Bonds Cards that would not survive an even modest gust of wind, and an even more modest contemplation into its true internal dynamics. We would urge Messrs Abe and Kuroda to come up with a fall back plan to the fall back plan before it, once again, becomes too late.

As Nikkei Asian Review reports,

The Government Pension Investment Fund and other public pensions sold about 1.8 trillion yen ($17.4 billion) more in Japanese government bonds than they bought in the first three months of the year, fueling speculation that the GPIF may be rebalancing its portfolio sooner than expected.

 

The pensions' net selling of JGBs and "zaito" bonds -- the latter used to finance the government's fiscal investment and loan program -- totaled 1.85 trillion yen, according to flow-of-funds statistics released Wednesday by the Bank of Japan. This marked the third consecutive quarter of net selling and the largest sum since the April-June quarter of 2012.

 

The GPIF is the world's largest pension fund, with roughly 130 trillion yen in invested assets, and is set to revise its portfolio by autumn. As part of its growth strategy, the government has been considering raising the proportion of domestic stocks in the fund to nearly 20% from the 17% at the end of 2013, as well as scaling back its bond allocation to less than half. Investors are paying close attention, since such a shift would send money streaming into the stock market.

 

"If the proportion of stocks goes up to 20%, roughly 4 trillion yen will flow from government bonds into stocks," says Keiichi Ito of SMBC Nikko Securities.

 

The rebalancing could also lead to sell-offs of the yen, which is seen as a safe asset, if rising share prices lure investors.

 

Some market watchers say pension fund money has already begun moving into equities. The Nikkei Stock Average hit a roughly four-and-a-half-month high Thursday. That share prices are rising even as the yen trades in a narrow band of around 102 against the dollar is spurring suspicions that GPIF money is flowing in.

Which is hardly surprising since Abe's popularity and approval rating appears directly linked to the level of the Nikkei 225 - Kuroda will do "whetever it takes" to keep the dream alive and as we noted previously, central banks are now among the biggest buyers of stocks in the world.

It seems once again - Meet the world's bubble-blowing bagholder - The Japanese Pensioner

But be careful what you wish for...

As we discussed previously, if indeed the GPIF does reallocate into equities (a very big if considering its multi-functional usage depending on the dry-powder threat need du jour), it will have to sell JGBs. Even more than it has sold so far. Which will then precipitate yet another rout in the JGB market, from where we go into such issues as the "VaR shock" we described two weeks ago (a topic the FT caught up with today), and all too real capital losses for Japanese banks who mark JGBs on a MTM basis.

Here is what HSBC had to say on this issue:

There is also an asymmetric risk to JGB yields in the very long term (ie beyond the next couple of years), making diversification compelling on a risk-adjusted basis. If official policies in Japan begin to bite and inflation rises on a more sustainable basis, this would place pressure on interest rates and materially reduce the value of JGBs held by banks. Yet, given the scale of such holdings, reducing exposure to JGBs would be difficult. Japanese financial institutions hold a substantial amount of JGBs. According to the BIS, Japanese banks hold 90% of their tier 1 capital in JGBs. Japan’s largest bank, Bank of Tokyo-Mitsubishi, has already acknowledged that reducing its USD485bn holdings of JGBs would be disruptive for the markets

Wait, what? Let's read more from the FT, shall we:

Nobuyuki Hirano, chief executive of Bank of Tokyo-Mitsubishi, admitted that the bank’s Y40tn ($485bn) holdings of Japanese government bonds were a major risk but said he was powerless to do much about it....The risk facing Japanese banks from their vast holdings of government bonds has been underlined by the chief executive of the country’s largest bank who said it would struggle to reduce its exposure.

Well that's not good: if the largest Japanese bank can't handle what may soon be concerted selling by one of the largest single holders of JGBs, who can? And what can be done then?

Oh, that's right: this is where Kuroda's plea to please not sell bonds, just to buy stocks comes into play. The problem is only the BOJ can come up with money out of thin air, for everyone else buying something, means selling something else first. So unfortunately unless the BOJ wishes to further increase its QE, which will be needed to absorb all the selling without a surge in yields (something Kyle Bass warned about last week), a move which however would further break the connection between bonds and inflation expectations, and further destabilize the equity, FX and bond markets.

So in short: Japan's Plan B is not only not a panacea, but it is a House of Bonds Cards that would not survive an even modest gust of wind, and an even more modest contemplation into its true internal dynamics. We would urge Messrs Abe and Kuroda to come up with a fall back plan to the fall back plan before it, once again, becomes too late.

Finally, for those who just can't get enough, we recommend the following piece by James Shinn for Institutional Investor which should explain all lingering questions about what really goes on at Japan's Plan B.

 

GPIF - Ant, Grasshopper and Widowmaker

 

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Sun, 06/22/2014 - 19:05 | 4883957 buzzsaw99
buzzsaw99's picture

that money goes straight into the maggot's pockets

Sun, 06/22/2014 - 19:18 | 4884001 Pladizow
Pladizow's picture

Pension money is not flowing into equities to prop up markets. It's going there out of neccessity for yield!

Sun, 06/22/2014 - 19:54 | 4884056 NoDebt
NoDebt's picture

I think Japan may be on to something here.  We know their bond market is already devoid of natural buyers- only the BOJ is in there buying at these lofty price levels (the whole bond market, including futures, running for HOURS at a time without a trade).  But there IS a buyer- one with a printing press.

Pension funds/banks want to unload JGBs in favor of stocks.  Fine.  They know if they go at a measured pace, the BOJ will always be there to buy those bonds for a good price.  

Inflation kicks up, who cares?  Banks/pension funds can still sell their JGBs at a BOJ-determined price.  No hit to capital, no losses to the pension fund's assets.  JGBs become "dead" as an asset class for outside investors (I could forsee yield well below the rate of inflation), but they still circulate from the government to the banks to the BOJ and they all get to pretend Japan isn't WAY past broke.

Just a new twist on the old policy of handing free money to the banks to go do risky things.  Meanwile, the average Japanese citizen watches their standard of living slowly erode.

Sun, 06/22/2014 - 19:58 | 4884070 CrashisOptimistic
CrashisOptimistic's picture

First of all, elderly sellers of bonds aren't rotating.  They are paying for food in retirement.

Second of all, if equity funds also had a decline, it's proven.

Sun, 06/22/2014 - 20:04 | 4884079 El Oregonian
El Oregonian's picture

The Japanese bond market is more toxic than Fukushima and sinking faster than those four Reactors. Very sad (not to mention criminal) really.

Sun, 06/22/2014 - 21:09 | 4884210 kchrisc
kchrisc's picture

Time for "gates and fees.

Sun, 06/22/2014 - 19:13 | 4883983 SmilinJoeFizzion
SmilinJoeFizzion's picture

That portfolio can go upside down in seconds.

Sun, 06/22/2014 - 19:21 | 4884006 The Most Intere...
The Most Interesting Frog in the World's picture

They gonna monetize all dat shit. No other option...

Sun, 06/22/2014 - 19:25 | 4884019 401K of Dooom
401K of Dooom's picture

Hmmm, are there any markets that actually have any equities with value in them?  I'm just asking out of curiosity.

Sun, 06/22/2014 - 19:30 | 4884032 disabledvet
disabledvet's picture

130 trillion yen is only 170 billion in dollar terms.

Calpers alone is what...100 billion?

What about Pimco or Vanguard or Magellan? And these are mutual funds...not subject to Government diktat (per se. If your destroying the value of the dollar or hyper inflating the economy or both they certainly are not.)

How many companies have over a 100 billion in market cap? In the USA right now that would be more than a few.

Of course when looked at from a sales perspective some of those internals look a little freaky.

Sun, 06/22/2014 - 19:38 | 4884043 disabledvet
disabledvet's picture

My bad. Calpers has over 300 billion. Vanguard says well north of a trillion and the same goes for Pimco. Magellan Fund(s?) has been kicked to the curb apparently with "only" 25 billion or so.

I imagine that fund run by that dude in Texas with all that gold and nickel is doing quite good as well.

Mon, 06/23/2014 - 08:43 | 4885070 Ides of November
Ides of November's picture

130 trillion yen is more like $1.7 trillion. It's about 100 yen to the dollar - not 1,000. :-)

Sun, 06/22/2014 - 20:02 | 4884075 news printer
news printer's picture
Gazprom strategy: swapping dollar bonds for gas pipelines
Read more: http://voiceofrussia.com/2014_06_22/Gazprom-strategy-swapping-dollar-bonds-for-gas-pipelines-7413/
Sun, 06/22/2014 - 20:10 | 4884086 Spungo
Spungo's picture

Kuroda and Abe should probably have plans to leave the country if this thing blows up.

Sun, 06/22/2014 - 20:16 | 4884095 orangegeek
orangegeek's picture

So that means that if IBM earnings tank and sales suck the big one, my shares in IBM go up, right??

 

Hey, I just received 39% on a recent certification exam - success!!!!!!  I passed!!!!!

 

This is all making sense to me now!!!!  Loving it!!!!

 

My next move is to not tell my boss and not show up for work for two weeks.  Then I'll demand a raise.  It can't miss!!!

Sun, 06/22/2014 - 20:25 | 4884121 Kprime
Kprime's picture

15 mil bonus for you

Sun, 06/22/2014 - 21:24 | 4884262 WMM II
WMM II's picture

" Japan’s largest bank, Bank of Tokyo-Mitsubishi, has already acknowledged that reducing its USD485bn holdings of JGBs would be disruptive for the markets"

 

let's hear it for the fx market.

so much supply such that they can only make more of them.

any of them.

all of them.

whee!

 

:)

Sun, 06/22/2014 - 21:49 | 4884300 motorollin
motorollin's picture

JGB stands for Japanese Grade Bond right?

Sun, 06/22/2014 - 23:31 | 4884559 AdvancingTime
AdvancingTime's picture

Japanese Government Bond

Mon, 06/23/2014 - 00:28 | 4884633 motorollin
motorollin's picture

Just a joke, but thanks. ;)

JGB could be Junk Grade Bond which == Japanese Grade Bond

The joke most definitely made more sense in my head.

Sun, 06/22/2014 - 23:29 | 4884552 AdvancingTime
AdvancingTime's picture

 Japan continues to slide towards an economic abyss with each passing day. The writing is on the wall. Japan is facing a wall of debt that can only be addressed by printing more money and debasing their currency. This means paying off their debt with worthless yen where possible and in many cases defaulting on promises made. Japan's public debt, which stands at around 230% of its GDP and is the highest in the industrialized world.

 The moment the Japaneses stock market fails to rise enough to offset inflation this will turn into a tsunami of  money fleeing Japan and constitute the end of the line for those left holding both JGBs and the yen. This has been a long time coming and I contend the cross-border flow of money leaving Japan is why some stock markets have remained so resilient . When Japan crumbles it will be felt across the world. More on this subject in the article below.

 http://brucewilds.blogspot.com/2014/05/japan-sliding-towards-abyss.html

Mon, 06/23/2014 - 06:53 | 4884890 Last of the Mid...
Last of the Middle Class's picture

JGB=Japan Good Bye!

Do NOT follow this link or you will be banned from the site!