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Japan’s public pension fund to hike investment in foreign bonds

  • October 1, 2019
  • , Nikkei , p. 1
  • JMH Translation

The Government Pension Investment Fund (GPIF), which manages public pensions, plans to expand its management of foreign bonds. The GPIF wants to change its asset management plan so that it can treat foreign bonds as domestic bonds if they are hedged against potential losses associated with currency fluctuations. This would effectively expand the amount that the fund can invest in foreign bonds. The move has been prompted by increased difficulty in managing funds in Japanese government bonds due to the Bank of Japan’s negative interest rate policy, which is significantly affecting the management policy of the GPIF, one of the world’s largest pension funds.


The GPIF will soon announce changes in its management plan. The fund managed about 160.6 trillion yen worth of assets as of the end of June, with a diversified portfolio comprising both domestic and foreign stocks and bonds.


The “basic portfolio,” a guideline for asset allocation, limits investment in foreign bonds to 19% of the portfolio. But foreign bond holdings increased to about 29 trillion yen — 18% of the portfolio — at the end of June.


A foreign exchange hedge is a method to avoid losses from a stronger yen by signing a contract to sell a foreign currency and buy yen in the future upon investing in foreign bonds. The GPIF held hedged foreign bonds worth about 1.3 trillion yen at the end of March. If these are treated as domestic bonds, it will give the GPIF more room for investing in foreign bonds. Beginning in fiscal 2018, the fund started actively purchasing more hedged foreign bonds.


The GPIF will substantially increase investment in foreign bonds because the BOJ’s negative interest rate policy is causing the yield of Japanese bonds to remain negative and making Japanese bonds less attractive. In September, the long-term interest rate temporarily dropped to nearly minus 0.3%.


Even though the GPIF purchases Japanese bonds, it has to pay commissions and its assets, which will be part of future pensions, will be reduced. If it puts money in a trust bank instead of managing it, the pension fund has to partially shoulder commissions associated with the negative interest rate. The side effects of the negative interest rate policy are clearly seen in the GPIF’s pension management.


The management rate of Japanese bonds reached a record low of a little under 27% at the end of June. Bonds come with latent profits because a lower interest rate increases bond prices. But the GPIF, which engages in long-term investments, will focus on interests and dividends.


After the introduction of the negative interest rate policy, investment yields of Japanese bonds have declined. Attention will be focused whether the GPIF will increase the rate of foreign bonds after a review of the basic portfolio slated for fiscal 2019.

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