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Japan's Public Pension Weighs New Investments
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By MARIKO SANCHANTA And MEGUMI FUJIKAWA

TOKYO—Japan's public pension fund—the world's largest with assets
totaling 123 trillion yen ($1.43 trillion)—is weighing the
controversial idea of investing in emerging-market economies as a way
to gain higher returns as it faces a tsunami of payout obligations
over the next several years.

The conservative Government Pension Investment Fund, which alone is
larger than India's economy, has a staggering 67.5% of its assets tied
up in low-yielding domestic bonds. The fund plans to sell off a record
four trillion yen in assets by the end of March 2011 to free up funds
for payouts to Japan's rapidly aging population. By the year 2055, 40%
of Japan's population is expected to be over the age of 65.

Japan is becoming a template for the rest of the world as it grapples
with how to cope with its elderly citizens: With 21% of the country
now over 65 years of old, it has the world's highest proportion of
seniors. Countries such as Italy, Germany and Sweden are carefully
studying how Japan deals with its rising health-care costs and pension
payouts. Within Japan, debate has been brewing over how the powerful
GPIF allocates its assets in the near-term, given the shrinking number
of workers who pay pension contributions.

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A girl looks at the skyline from an observation deck in Tokyo, Japan.


The GPIF holds the lion's share of its assets in low-yielding Japanese
government bonds. (The yield on the 10-year JGB is currently a paltry
1.07%.) Roughly 67.5% of its assets are parked in domestic bonds,
including government and corporate bonds; the rest are spread among
Japanese stocks, overseas shares and foreign bonds.

Takahiro Mitani, president of the government pension fund,
acknowledged in an interview with The Wall Street Journal that the
GPIF could face a few years where its payouts exceed incoming
contributions. We "may face difficulty in the next 4 to 5 years…we
currently have a hard time catching up with payouts since wages have
been on a downtrend recently."

Regarding its four-trillion-yen selloff this year, Mr. Mitani said:
"We won't only target [selling] domestic bonds. It could be [Japanese]
stocks or foreign-currency-denominated securities or stocks,"
depending on market conditions.

Some government officials have urged the GPIF to invest in higher-
risk, higher-return assets, or prodding it to consider setting up a
Singapore-style sovereign-wealth fund. Kazuhiro Haraguchi, Japan's
internal affairs minister, has said the fund should take a more
proactive approach.

John Vail, chief global strategist at Nikko Asset Management, echoed
that sentiment. "They need to take on more risk. As a long-term
investment, equities will nearly always outperform JGBs," he said
"Global equities are a wise investment for the GPIF—especially with
equities being so inexpensive."

Mr. Mitani said he is aware of such opinions, but his mandate is to
invest in "safe" assets with a long-term view. "In 2008 after the
collapse of Lehman, while we posted a negative result we were
relatively better than overseas pension funds thanks to our
conservative, cautious stance. We posted only single-digit
[percentage] loss while others posted double-digit loss," he says.

In the U.S., the California Public Employees' Retirement System, known
as Calpers, is the nation's largest with assets of $200 billion.
Calpers reported a 23% slump in the year ended June 30, 2009, marking
its worst year ever. Some of the biggest hits were from private or
alternative investments such as real estate. Calpers has since begun
pulling back on such exposure. In comparison, the GPIF reported only a
7.6% slump in the fiscal year ended March 31, 2009.

In terms of possibly investing in emerging markets, Mr. Mitani says it
is unlikely the GPIF would focus on a single country.

Journal CommunityDISCUSS
“Japan is a very good example to be looking at, in order to
anticipate the demographic problems that many other countries will be
facing in the future.”
—Mandy Simons
"One of our basic investment philosophies is to have diversity," he
said. "So, it's hard to imagine for us to invest in a China-exclusive
fund, for instance."

Mr. Mitani expects the 10-year JGB yield to mostly stay below 1.5% for
the next two to three years, though it may break above that point
temporarily. He added that he isn't too concerned about the risk that
JGB prices will plunge due to fears about increasing JGB supply,
creating a Greek-style fiscal crisis.

"If financial firms keep receiving ample funds from [the Bank of
Japan], if companies remain reluctant to borrow, and if individuals
keep savings at banks, there's no choice but to purchase government
bonds," Mr. Mitani said.