Panel urges Japan public funds to diversify $2 trillion in investments

Takatoshi Ito
Takatoshi Ito

An expert panel advising Japan’s government on the management of roughly $2 trillion of public pension fund money Wednesday urged a shift from Japanese government bonds to heavier weightings for foreign assets and alternative investments, in line with the examples of top public funds around the globe.

In a final report released late Wednesday, the seven-member panel — led by Takatoshi Ito, Tokyo University professor and former Finance Ministry official — said Japan’s $1.2 trillion Government Pension Investment Fund, Tokyo, and other major pools of public pension assets should diversify into new asset segments “including real estate investment trusts, real estate, infrastructure, venture capital, private equities and commodities.”

The report suggested the GPIF and other public funds should implement that recommendation “taking into consideration the investment models of advanced public pension funds at home and abroad.”

The report included a range of recommendations, including:

  • changing the institutional structure of public pension funds to give them greater independence from government officials;
  • boosting the actively managed portion of public pension portfolios above — for example — the 20% of the GPIF’s domestic equity portfolio that is actively managed at present;
  • setting up “baby funds” within huge pension pools such as the GPIF capable of investing in an “independent and flexible” manner;
  • adopting new benchmark indexes, such as the recently launched JPX-Nikkei 400 index, which has a heavy focus on return on equity;
  • adopting a more dynamic approach to asset allocation; and
  • allowing more leeway to provide the competitive pay needed to field the top-flight investment staff needed to oversee a more modern portfolio.

Conceding that considerable time could be required to craft the legislation necessary to implement the panel’s recommendations, the report delineated reforms that could be pursued in the near-term, such as using the current investment bands of six to eight percentage points around existing asset allocation targets to shift portfolios away from Japanese government bonds.