Problems flagged with Japan pension reform

Last week's announcement that Japan's ¥127 trillion ($1.2 trillion) Government Pension Investment Fund is changing its allocation targets to double its equities exposure was a long time in coming.

It was also no big surprise that the country's other big pools of retirement money – the three big mutual aid associations, Japan Post Insurance and the Small Enterprise Retirement Allowance scheme (Serama) – will be expected to take a similar route.

All this will presumably help drive up and support stock prices and have a positive effect on inflation and the economy – as is its objective. But there is a downside, Jo McBride, publisher of the Japan Pensions Industry Database, will argue today in her regular blog post*.

The three MAAs, with combined assets of ¥27 trillion, have already been told they should follow GPIF's lead, noted McBride, and Serama will probably have to do the same “whether or not it is actuarially appropriate for it to do so”.

But such investment flows will hardly encourage domestic companies to improve governance and shareholder value if they are guaranteed, come rain or shine.

GPIF has been given the following new allocation targets: Japanese stock exposure 25% (up from 12%), foreign stocks 25% (12%), foreign bonds 15% (11%), domestic bonds 35% (60%). There is no stated level for short-term.

It makes sense that any Japanese pension fund be free to have 50%, or even 100%, of its assets abroad, said McBride. After all, growth opportunities offshore are far higher there than they are at home, where the workforce is set to shrink and the economy must, ultimately, do the same.

“But assuring the local stock market that it will always be home to a quarter of the country's huge of pool of pensions savings is as unhealthy as previously assuring the government bond market that it would always have half.

“In an age of equities indexing,” added McBride, “it seems especially misguided and antithetical to the Abenomics idea of shareholders seeking 'engagement' with companies through such devices as stewardship codes so as to make them better managed and more competitive.

“Leaving management of the funds to market forces and investment professionals would have been a much better bet.”

* Visit http://www.ijapicap.com/blog/ for the full text, which will be posted around noon Japan time today.