Let’s analyze the likely effects of the Japan Government Pension Investment Fund (GPIF) reallocation result a little bit better, there are generally a lot of market moving data coming around here in blocks. The equity market scramble has died down a bit and the Nikkei 225 futures seem to have been consolidated around 16 800, but the market opening in the US will be… interesting!
- The new GPIF target weights will be 35% for Japan Government Bonds (JGBs), 25% each for domestic stocks and foreign stocks as I have already mentioned, and 15% for foreign bonds. Between these, 5% can be allocated to alternative investments such as hedge funds, ETFs, PE/VC, Japanese Real-Estate Investment Trusts (J-REITs) and so on.
- Prior target weights were 60% for JGBs, 12% each for domestic and foreign stocks, 11% for foreign bonds and the balance of 5% in a separate alternative investments section.
- Because of the relatively massive allowance for deviations from the targets that the GPIF is allowed, the actual weights of the asset allocation had been somewhere in the region of 53.4% for JGBs, 17% for domestic equities and 16% for foreign stocks, and slightly above-target for foreign bonds, but rounded to target here.
Let’s look at the non-foreign stock implications then!
Some analysts are expecting a very gradual move out of this, potentially spanning 5 years to reach areas around the current target allocations. For several reasons I think this is faulty and those will be recapped a little later after showing the likely allocations. For the sake of the argument, I will assume that the 5% alternative investments have been equally distributed (1.25%) for each sector, on the basis that I think JGB hedge funds are probably not that interesting to invest in if you’re the GPIF, and the remaining allocations previously being relatively equivalent in targeting. The effective targeting difference from the current levels thus becomes:
- JGBs: 54.65% to 35% = -18.25%, decrease by JPY 24.96 trillion.
- Japan equities: 18.25% to 25% = +6.75%, increase by JPY 8.57 trillion.
- Foreign equities: 17.25% to 25% = + 7.75%, increase by JPY 9.84 trillion.
- Foreign bonds: 12.35% to 15% = + 2.65%, increase by JPY 3.37 trillion. (Added 0.1% to starting value to adjust for rounding elsewhere).
How much capitalization is there on each of these markets? Well the JGB market is capitalized to about JPY 1200 trillion yen, and domestic stocks are capitalized to ~US$4.5 trillion or something like 500 trillion yen. The re-balancing needs reflects roughly a move out of JGB’s that’s 2% of the market and mirrored by a 1.7% market capitalization move into equities. Assuming that the GPIF is the benchmark for pension funds representing a net worth of its own asset base (as I did in the prior post) pension funds will thus move 4% of the market capitalization (~50 trillion) of the JGB market and 3.5% of the equity market. Foreign assets will not be evaluated since the equity markets were covered previously (across-the-board 1% gain roughly from GPIF and its tail) and the bond markets globally are too big for this to make any overall difference.
With the pension funds alone exiting the JGB market to the tune of 50 trillion yen, that would imply about 8 months of the BOJ’s monetary base easing goes only to those pension funds looking to dump JGBs, and no other market participants cutting the exposure. Just on market overall re-balancing in the wake of the GPIF, it feels like the complete market will be moving out enough gross long-term to represent 3 years of JGB buying by the BOJ (no quantitative backing on this one, and no net numbers either). Still, unless the BOJ steps up even further, having much longer than a 2-year horizon to exit JGBs might be very difficult for the GPIF if it looks to preserve capital, but anything faster might be somewhat disruptive to the market and they probably need to take every chance to sell into JGB strength.
Conversely, they could very well be acting as a floor for Japanese equity markets in the slightly longer term after an initial front-running has been made by the overall Japanese equity market. However, the equity market has room to grow long-term compared to the overall Japanese asset base and increased inflation increasing equity valuation and GDP while not (nominally) changing payment demands. If this move long-term is sustainable then today could very well have been the day Japan’s overall capital structure changed forever.