GPIF hunts for overseas bonds to escape Japan’s low yields

The Japanese government pension investment fund is rebalancing its $ 1.4 billion portfolio to foreign bonds to escape the lowest domestic yields in a move that breaks with decades of tradition.

As part of its new targets, which will officially come into effect on April 1 but have already marked global investment flows, the GPIF will reduce its target holdings of national bonds from their current share of 35% to 25%.

Yields on Japanese government bonds have been suppressed by negative interest rates and years of bond purchases by the Bank of Japan, limiting the country’s borrowing costs through a strategy known as control name of the yield curve. Yields on Japanese 10-year bonds have dropped from almost 2% in 2006 to less than 0.2% today. The yields move inversely with the price.

GPIF’s target holdings of foreign bonds – mainly US treasury bills – will drop from 15% to 25% of the portfolio. The fund’s holdings of domestic and foreign stocks will remain unchanged at 25% each. In each asset class, the GPIF will allow itself between 6-8 percentage points of latitude upwards or downwards.

The change, which had been widely anticipated, had resulted in a series of record investment outflows from Japan in recent weeks.

Takafumi Yamawaki, rate strategist at investment bank JPMorgan, said that GPIF had probably done most of the reallocations in foreign bonds before the official announcement. Other large Japanese public pension funds that mimic GPIF – which have a collective under management of 50 billion yen ($ 461 billion) – would now follow suit.

Foreign bond outflows from Japanese investors, he said, could continue for some time due to the lack of income offered at home, including the 120 billion yen held in private pension funds .

Hours before the portfolio changes were announced, architect Hiromichi Mizuno, the fund’s chief investment officer, said on Twitter that he would leave on Tuesday and leave the fund.

He thanked his supporters and said he had spent his five years at GPIF “exploring what long-term investing should look like for all generations.” A GPIF official said his replacement would be named on Wednesday.

Mr. Mizuno has become one of the most eminent figures of the “Abenomics” era and is widely recognized for having pushed the country’s business sector towards better governance by putting pressure on the asset managers appointed by GPIF.

Its main influence, according to two of these fund managers, has been to reset global investors’ view of Japan as a market that is evolving for the better.

But, according to people close to Mr. Mizuno, his approach also made him unpopular in conservative business circles in Japan and within GPIF. He wanted to leave last summer, said the same people, but was convinced to stay because GPIF had had such a hard time finding a replacement.

Among Mr. Mizuno’s most controversial measures was the statement last December that the GPIF would no longer lend foreign stocks it held to short sellers, arguing that there was a need to create a healthier investment climate.

The start of the new Japanese exercise on April 1 will see Masataka Miyazono, the former executive of the Norinchukin Bank, installed at the head of GPIF. He will appoint the new IOC.

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