While in the past 3 months both the USDJPY and the Nikkei index have soared on the same vague mix of promises (than can never be delivered), and threats (by central bankers, which work only as long as they remain purely abstract and are not acted upon), one security that has barely budged are Japanese bonds: without doubt the fulcrum security that will put a premature end to Abe's latest attempt to reflate an economy, whose total debt is a ridiculous 2000% of annual public revenues, and which will spend half of its annual tax income on interest expense if rates merely double from their record low levels. Until now: Bloomberg reports that Japan's Government Pension Investment Fund: the largest retirement fund in the world overseeing 108 trillion yen ($1.16 trillion), and historically the biggest buyer of Japanese bonds, "will begin talks in April about whether to reduce its 67% allocation to domestic bonds." Read: sell, which may be why we have already seen a rather steep move across the JGB complex overnight, because one the largest player in the space moves, everyone else follows as nobody wants to be the last seller left.
And once the selling begins, logically so does the countdown to the end of Japan's latest reflation attempt, as like it or not, Japan can not afford rising rates, no matter how high it blows the stock market bubble (which by the way is unchanged in non-yen terms), as the alternative is a full blown banking sector crisis, coupled with a public funding crisis.
And also because this time is no different from all the other times Japan has done just this. Only on no previous occasions did Japan have some JPY1 quadrillion in public debt, or nearly 250% in debt/GDP.
From Bloomberg [11]:
The GPIF, as the fund created in 2006 is known, didn’t alter the structure of its holdings during the worst global financial crisis in 80 years or in response to the 2011 earthquake and nuclear disaster. Talks to shift its positions come as Prime Minister Shinzo Abe and the Bank of Japan pledge to restore economic growth and spur inflation, which will mean higher interest rates, Mitani said.
“If we think about the future and if interest rates go up, then 67 percent in bonds does look harsh,” Mitani, who was an executive director at the Bank of Japan when it bought shares from banks in 2002, said. “We will review this soon. We will begin discussions for this in April-to-May. Any changes to our portfolio could begin at the end of the next fiscal year.”
GPIF, one of the biggest buyers of Japanese government bonds, held 69.3 trillion yen, or 64 percent of total assets, in domestic bonds at the end of September, according to its latest quarterly financial statement. That compares with 12 trillion yen, or 11 percent, in Japanese stocks. The asset manager had 9.6 trillion yen, or 9 percent of its portfolio, in foreign bonds and 12.6 trillion yen, or 12 percent, in overseas stocks.
This is a tectonic shift for an asset allocator who has been steadfast in what it buys:
GPIF is the biggest pension fund in the world by assets under management, according to the Towers Watson Global 300 survey in August, followed by Norway’s government pension fund.
The portfolio structure has been broadly unchanged since 2006 when it was formulated with an outlook for consumer prices to rise 1 percent annually. Instead, they have fallen.
“The portfolio was based on a prerequisite of things such as long-term interest rates at 3 percent on average for the next 100 years,” Mitani said. “Whether this is good will be a possible point of discussion.”
Good luck with that because momentum plays and chasing "hot money flows" always, without fail, end up with a Hollywood ending. As for the "100 year forecast" confusion, it stems from the glaring contradiction that is debt monetization by the BOJ coupled with a government mandate to crush the Yen. The fear is that at least for the time being, if not in the long-term, the latter will overtake the former.
“JGBs were how we made money over the past 10 years,” Mitani said. “The BOJ said that they are increasing buying bonds, but they’re also putting power into lowering interest rates. If the economy gets better, then long-term interest rates like a 10-year yield at less than 1 percent are unlikely.”
Yet where the real comedy is about to begin is that instead of investing people's retirement money in at least modestly safe securities which the BOJ openly monetizes, the GPIF will focus on some riskier assets: "The fund may increase holdings in emerging market stocks and is evaluating alternative assets, he said." Good luck with the former: Japan will be only some 10 years behind the curve. As for "alternative assets", if this includes gold, prepare for liftoff as all other retirement fund managers across the world, who have a blended allocation to gold somewhere between 0% and 0.5%, piggyback on Japan's example.
At the end of the day, however, none of the above matters. Japan's Yen will fall a little more, its equities will rise, but all that matters is when and if the bond tumbles. Once that happens, and once Japan's leaders take a look at the chart below, first presented in "Japan's WTF Chart" [12], everything will be quickly put back in its original place, Abe will be "retired", and this latest experiment in ending Japan's self-sustaining three decade long liquidity trap will be promptly forgotten.
[13]