* Consumption tax and oil prices could be risk for JGBs
* GPIF’s asset size of $1.3 trln equivalent to Spain’s GDP
* Hopes to start emerging markets investment Apr-June or
July-Sept
* GPIF concerned about insider trade probe by Sumitomo
Mitsui Trust
(Adds comments, details)
By Chikafumi Hodo and Michiko Iwasaki
TOKYO, April 6 (Reuters) – Japan’s $1.3 trillion Government
Pension Investment Fund, the world’s biggest public pension,
said yields on Japanese government bonds are unlikely to surge
for a while as there is plenty of demand from cash-rich domestic
banks.
Takahiro Mitani, chairman of the GPIF, said the environment
for JGBs will remain favorable for some time as the country
stays in a deflationary phase and it may take a lot of time for
the economy to grow more than 1 percent on a sustainabe basis.
“I don’t think (JGB yields) will fall sharply from the
current level. They are near their lows, but the yields are not
expected to surge from here,” Mitani told Reuters in an
interview on Friday.
Mitani also said domestic corporate earnings will be healthy
and companies will have ample cash on hand thanks to the Bank of
Japan’s monetary easing and the recent weakening of the yen.
This would increase cash positions of banks and would lead
to more funds moving into JGBs, he added.
However, there is a risk for JGBs if the government fails to
implement its plans to raise the consumption tax, he said.
Japan’s government submitted laws last week to double its
sales tax by 2015 to fund swelling social security costs in the
world’s fastest-ageing nation, setting up a showdown that could
split the ruling party, force early elections and deepen policy
paralysis.
Mitani said the high oil prices and tensions between Iran
and Israel could be another risk for JGBs.
The GPIF invests reserves of national and corporate pension
plans. It allocates about two-thirds of its assets to JGBs,
where the yield on benchmark 10-year bonds is
languishing below 1 percent.
Mitani said economic conditions in the United States and
Japan were improving and conditions in Europe were better than
in November, after the European Central Bank implemented strong
measures to keep the region’s debt crisis from spiraling out of
control.
In regards to the pension fund’s investment performance, the
GPIF may have posted a positive investment return during the
previous financial year that ended in March, Mitani said.
The fall of the yen during January appeared to have
helped the public fund’s investment, he said.
The public fund’s holding of foreign shares helped the fund
generate a positive investment return in the October-December
quarter of 0.58 percent, for an investment gain of 619 billion
yen.
However, its rate of return in the nine months to December
was minus 2.5 percent, losing 2.87 trillion yen.
The actual performance figures for 2011/12 are expected to
be released mid-year.
SEEK HIGHER RETURNS
The GPIF, which is under pressure to raise returns to cope
with the growing number of pensioners, is closely watched by
markets as its 108.1 trillion yen ($1.3 trillion) portfolio is
nearly as big as the economy of Spain.
In the year to March 2013, when the first wave of Japan’s
baby boomers is set to turn 65 and becomes eligible to receive
pension payments, the public fund would need about 8.87 trillion
yen of cash for pension payouts.
Mitani said the amount of cash needed to repay pension
recipients appeared to be getting larger than the original
forecast compiled by the government three years ago.
Along with more retirees, fewer people are contributing to
public pension plans. Lower salaries and companies hiring fewer
full-time employees are limiting inflows into the public pension
scheme, Mitani said.
In the year to March 2011, the GPIF sold 4.77 trillion yen
worth of assets, made up of 4.37 trillion yen in domestic bonds
and 405 billion yen in foreign equities.
The actual cash sales for 2011/12 are expected to be
released mid-year, along with the investment performance.
With a view to boosting returns, the GPIF hopes to begin
long-awaited investments in emerging market equities from the
April-June quarter or the following quarter, and it is
continuing to study opportunities to diversify further, Mitani
said.
The GPIF has already selected asset managers to supervise
its investments in emerging market, although opening up accounts
in emerging countries was taking more time than it would in
developed countries, the chairman said.
The GPIF originally planned to begin investment in emerging
markets equities by the end of March.
Sources had said in September that 11 companies were on the
final shortlist to supervise investments into emerging markets
equities for the GPIF.
Mitani did not say how much the fund would invest in
emerging market equities, but noted the initial amount would be
small.
INSIDER TRADE
Closer to home, the GPIF was concerned about an insider
trading probe involving Sumitomo Mitsui Trust Bank (SMTB) as the
public fund entrusts a large amount of cash to the trust bank’s
asset arm to supervise investments in domestic bonds and stocks,
Mitani said.
Japan’s securities regulator recommended last month a 50,000
yen ($600) fine against Chuo Mitsui Asset Trust Banking, saying
the asset manager sold Inpex shares after a tip-off
about its plans for a $6 billion offering in 2010.
SMTB was created this month through a merger of Chuo Mitsui
Asset Trust and Banking and two other banks under Sumitomo
Mitsui Trust Holdings.
“We are not considering totally removing (SMTB) from our
mandate, but it is possible that we may refrain from allocating
new funds in it for a certain period of time,” Mitani said.
“We need to watch what kind of measures would be taken by
authorities. By looking at their action, we will decide on what
kind of measures we would take,” Mitani said.
($1 = 82.3700 Japanese yen)
(Reporting by Chikafumi Hodo and Michiko Iwasaki; Editing by
Kim Coghill)
