JULY/AUGUST 2012 • INSTITUTIONALINVESTOR.COM
T
THE AIR INSIDE THE GOVERNMENT PENSION INVESTMENT FUND’S
Tokyo headquarters was as warm and dry as a spaceship’s. As president TakahiroMitani and his colleagues filed silently into an austere meeting room, I was sweatingslightly, struggling to compose my question with the correct level of Japanese politesse:“How did the world’s largest pension fund decide on such a conservative level of riskand return for its portfolio?”It was far from an idle question. The GPIF has ¥108
trillion ($1.36
trillion) in assetsunder management. That’s nearly six times as much as the California Public Employ-ees’ Retirement System, the biggest U.S. pension fund, and nearly four times as muchas Europe’s largest pension plan, Stichting Pensioenfonds ABP of the Netherlands.Even more striking than the fund’s gargantuan size is its composition: Fully threequarters of the GPIF is invested in bonds, including ¥58.4
trillion of domestic bondsand ¥14.4
trillion of government agency debt.Many large Western pension funds, led by pioneers like CalPERS and ABP, havechosen to reach for yield, a choice they know exposes them to big market swings. For
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Japan’s giant government pension fund sitson a mountain of government bonds —a low-return and potentially high-risk strategy.
BY JAMES SHINN
Widow-maker
INSTITUTIONALINVESTOR.COM • JULY/AUGUST 2012INSTITUTIONALINVESTOR.COM • JULY/AUGUST 2012
GPIF president Mitani pursues a conservative investment strategy at the pension fund. Will it deliver the returns that Japan’s retirees need?
JULY/AUGUST 2012 • INSTITUTIONALINVESTOR.COM
some of these funds, the portfolio losses of 2008–’09 were near-deathexperiences (CalPERS’s assets plunged 38 percent), pushing theirfunding ratios down into the red zone. Yet most of these funds aretrying to grow their way out by continuing to bet heavily on equitiesand making ever-larger allocations to private equity, hedge funds,real estate, infrastructure and other illiquid assets.But not the GPIF. At the end of 2011, the Japanese fund had 67.4percent of its portfolio invested in Japanese bonds, 11.1 percent in Japanese stocks, 8.4 percent in foreign bonds, 10.1 percent in foreignstocks and 3 percent in short-term assets. No exotic long-dated assetsanywhere. And fully 80 percent of the portfolio is invested passively.The GPIF’s financial conservatism is all the more striking con-sidering its demographic challenge: Japan is starting to slide downthe reverse slope of an inexorable demographic curve. Forecasts bythe country’s National Institute of Population and Social SecurityResearch estimate that the number of people between 15 and 64years old will nearly halve in the next 50 years, to 44.2
million in2060 from 81.7
million in 2010, even as the number of retirees swells. Japan’s public pension system was basically a pay-as-you-godefined benefit plan until the past decade, when Tokyo created theGPIF and began a series of incremental reforms designed to putthe country’s pension system on a more sustainable basis, such asincreasing contribution rates and reducing benefits. Those measuresfall well short of what’s needed to ensure that the GPIF will be ableto redeem the promises made to today’s workers, though. Already,the fund is paying out more in pension benefits than it receives incontributions, an inflection point it passed in 2009.The twin problems of government deficits and demographicdecline have seized center stage in Japan’s policy debate. All eyes areon the GPIF and its massive pot of money, to see whether the fundcan generate adequate returns on its portfolio. This debate highlightsseveral policy trade-offs of deep interest to pension funds, money man-agers and Treasury and Finance Ministry officials in North Americaand Europe, where countries face the same dilemma of demographicpressures and underfunded pension schemes. How Japan resolves itsdebate is bound to shape global financial markets in a profound way.Hence my trek to see Mitani-san. Why did the GPIF make itsconservative portfolio strategy choice? What political factors gotit there, and what governance structures keep it there? Who makesmoney from the GPIF’s strategy, and who might profit — or lose — from a shift in the fund’s risk-reward profile? These were just a fewof the questions I hoped to get answers to.
JAPAN IS MY SECOND COUNTRY. I AM PROBABLY ONE
of only a few foreigners who breathe a sigh of comfort after comingthrough Narita International Airport. I’ve been visiting Japan for fourdecades, lived in Tokyo for seven years and met my wife there. Thesocial clues and nuances, the linguistic indirection and politesse, aresecond nature to me now. Tokyo is constantly being rebuilt physi-cally, but the social infrastructure endures.Visitors to Japan are struck by how well the physical infrastructureworks. One of my trader friends turned to me after a week’s sojournin Tokyo and asked, “What part of this ‘lost decades’ story am Imissing? Japan is supposed to be stuck in a permanent recession,but the buildings are beautifully designed, traffic flows smoothly,everybody is well dressed and healthy, a Shinkansen [bullet train]leaves Tokyo Central Station for Osaka every five minutes, and thereare more Michelin three-star restaurants in Tokyo than in Paris.”He’s right. The Michelin three-star count is Tokyo: 14, Paris: ten.New York, by the way, has just seven.One of the answers to this conundrum is concealed behind ananonymous gray door in Kasumigaseki, the government quarter of Tokyo, which lies just south of the Imperial Palace. Kasumigaseki hasbeen the center of bureaucratic power in Japan for more than a cen-tury. The Ministry of Finance and the Ministry of Economy, Tradeand Industry practically glare at each other across Sakurada-dori, theavenue that bisects the district. These two ministries have competedfor sway over Japan’s economy since the end of World War II.Once the unquestioned headquarters of Japan Inc., the serriedranks of ministry buildings in Kasumigaseki are under siege figura-tively and, since the March 2011 Tohoku earthquake, literally. As Imade my way to the GPIF’s offices through a light March drizzle, anoisy scrum of anti–nuclear energy demonstrators gathered outsideMETI. The demonstrators’ placards accused the ministry of flawedregulation of Japan’s nuclear power industry. METI was basicallyconflicted; it was supposed to be the safety regulator of the veryindustry it was nurturing to reduce Japan’s dependence on importedoil. The government is similarly conflicted on pensions. It wantsthe GPIF to produce good returns, but it also needs to finance itsmassive deficit cheaply, which means stuffing ever more Japanesegovernment bonds, or JGBs, into the pension fund.Despite the antinuclear protest outside, there was no noise insidethe GPIF’s offices, once I finally found them. The pension fund istucked away on the second floor of a nondescript building set backfrom Sakurada-dori by a small brick plaza featuring one of Tokyo’somnipresent Takarakuji lottery kiosks — an ironic scene-setter for avisit to a fund where nobody gambles with money. There isn’t even areceptionist on the second floor. You must ring up your interlocutorfrom a phone on the wall of a small vestibule that feels as claustro-phobic as an airlock. The offices are plain, and the head count is just75, making the GPIF a seeming paragon of efficiency.Once I made it inside the fund’s offices, Mitani and two colleaguessat down with me, and we were brought the usual cups of green tea.Thoughtful and gracious, Mitani had a distinguished career at the Bankof Japan before joining the GPIF in 2010. He was flanked by Takashi Jimba and Tokihiko Shimizu of the fund’s research department.I noticed that Shimizu was holding an annotated copy of my
Insti-tutional Investor
article on CalPERS (March 2012 Americas edition),which described how the California pension fund was reaching foryield in a bid to dig itself out of a funding hole. I was curious what thethree of them made of CalPERS’s investment dilemma — that wasthe principal reason for my visit. They were curious about how Cal-PERS was rethinking its own strategy. “We consider them somethingof a peer,” said Shimizu. “And we follow what they are doing closely.”We went back and forth in a mixture of English and Japanese. I
“Our basic directive is to safely
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