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 [12], 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) [13] 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 [14]) into junk bonds and junk stocks [15] 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, [12]
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. [16]
It seems once again - Meet the world's bubble-blowing bagholder - The Japanese Pensioner [15]
But be careful what you wish for...
As we discussed previously, [17] 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 [18]" we described two weeks ago (a topic the FT caught up [19]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, [20]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.
