It used to be that just the BOJ (via ETFs) and the largest Japanese pension fund, the GPIF (the largest in the world), had an implicit green light to allocate funds (in the case of the former, created out of thin air) to equities. That is no longer the case: according to Bloomberg, Japan's second largest commercial bank, Japan Post Bank Co., has decided to follow in the footsteps of its giant peers, and plans to "plow" an 100 billion yen ($904 million) directly buying stocks "when it finds the right opportunities."
Unable to generate required returns through conventional means such as lending, Japan's second-largest bank by deposits, which currently invests in equities only through passive investments in funds, plans on becoming a giant prop-trading hedge fund and aims to boost active stock holdings to several hundred billion yen in the next five to 10 years, said Katsunori Sago, executive vice president at the Tokyo-based company.
In addition to stocks, the bank is also looking to buy "more higher-yielding overseas bonds", (although in a time when junk bonds have near record low yields, one wonders just what the bank envisions) and alternative assets as it seeks to boost growth "in an environment where returns are being depressed by the central bank’s policies of negative interest rates and yield-curve control." The allocation change is a huge departure for the lender which hold about 2 trillion yen in stocks, however all these are non-discretionary, through passive trust investments.
Speaking to Bloomberg, Sago said that "It’s not right to only rely on passive investment for our stock holdings. At the same time, making the whole 2 trillion yen portfolio active would end up being passive anyway, so we need both passive and active portfolios to gain an edge from the active investment.”
Currently the bank, which was partially privatized in a $12 billion initial public offering, oversees 207.5 trillion yen of assets as of June 30. Of this total, 66.9 trillion yen was in local government bonds, 55.3 trillion yen in cash and 51.3 trillion yen in overseas securities, which include debt and investment trusts. Soon, there will be an "equities" pie in the chart below.
Not surprisingly, yet another Goldman connection emerges: the bank's EVP Sato was was formerly vice chairman at Goldman Sachs Japan, before joining Japan Post in 2015. He told Bloomberg that the bank has already set up a new structure enabling it to directly invest in stocks. The company will incorporate environmental, social and governance principles into the process for selecting equities for its active portfolio, he said. In other words, it will pretend to be discriminating in buying; what it will do in reality, is buy every triple digit PE "growth" stock it can find.
Japan Post Bank’s foreign bond portfolio has a bigger weighting in the U.S. than in Europe, though it does have holdings in Germany, France and the U.K., Sago said. The company has recently cut some positions that were underperforming or had negative returns. He said he expects holdings of Japanese government bonds to fall as it plans to avoid reinvesting funds from maturing securities.
Not satisfied with taking unlimited downside risk, the bank also wants to buy more junk:
“There is also scope to review the proportion between investment grade and high yield, with the aim of increasing high-yield allocations mostly overseas, when the timing is right,” Sago said. “We have investments in junk bonds and high-yield bonds. If we see merit in light of our risk-return profile, we will invest regardless of the rating outlook.”
Finally, instead of just becoming a hedge fund, the "bank" will also be a fund of funds:
Sago said one area of growth is in what the company calls alternative assets, which include investments in private equity and hedge funds. Japan Post Bank is aiming to boost holdings of these products to about 5 or 6 trillion yen in the next five to 10 years, from the current 700 billion yen. The amount has already risen from 60 billion yen last September.
“Alternative assets are a major focus where investment needs to continue to be the strongest,” Sago said. “We are aiming to build a solid alternative portfolio both in quality and quantity.”
And while the above may be bad news for depositors who will fund this prop-trading expansion, it's good news for traders: Japan Post Bank plans to add about 20 more front-office staff within the next 12 months in addition to its current total of about 140, Sago said. The new hires will mainly focus on alternative assets, he said.
“There won’t be a market environment for a while where we can reinvest all of the money we get from maturing bonds,” he said. “There are not enough attractive investment destinations of this size.”
In other words, now that central banks may be tapering their direct purchases, it's time for the commercial banks to step in and do their patriotic duty of keeping stock markets afloat.