Market veterans say enough questions remain about Mr. Abe's ability to deliver on his pledges to justify a wait-and-see stance. Even so, any success could call into question asset allocation shifts by local pension executives over the past 10 years, which sharply reduced holdings of domestic equities while boosting already hefty weightings in Japanese government bonds with annual yields of less than 1%.
According to data compiled by Towers Watson K.K., the Tokyo-based subsidiary of investment consulting giant Towers Watson & Co., between Dec. 31, 2000, and Dec. 31, 2010, Japanese pension funds' average allocation to local bonds rose to 41.9% from 31.5% while allocations to domestic equities plunged to 16.2% from 34.7%.
More recent data compiled by Japan's Pension Fund Association show a similar trend for domestic equities, with an average allocation plunging to 17.4% as of Dec. 31, 2011, from 34% as of Dec. 31, 2000. The PFA data, which break out insurance “general account” products as a separate category, show those general account allocations rising to 14% from 11.3%, and domestic bond allocations climbing to 27.2% from 21.3% over the same period.
For the most part, market veterans don't expect a dramatic rebound in domestic equity allocations. According to Mr. Sato and others, the bulk of the buying fueling the recent upswing by Tokyo stocks has come from overseas.
There are exceptions. Some pension executives who sharply reduced their local equity allocations in the past said they've either added more domestic shares in recent months or are reviewing their weightings now in light of the latest economic policy discussions.
Yoshihiko Sato, Tokyo-based fund manager of the 46 billion yen ($529 million) pension fund for information technology systems provider NEC Fielding Ltd., which has a weighting of less than 1% in Japanese equities, said his team is considering adding to its holdings of domestic shares now — as it evaluates whether the new government's policies will result in lower equity-related risks and increased risks relating to government bonds.
Yoshisuke Kiguchi, chief investment officer of the 40 billion yen Okayama Metal & Machinery Pension Fund, Okayama, meanwhile, said after underweighting Japanese equities for the past three years, his team — anticipating “the slow normalization of the Japanese economy” and seeing local shares as oversold — brought its weighting to a neutral 8% of the portfolio, with 2% allocations in both October and November.
While the minority of Japanese pension funds that have set aside specific allocations to take advantage of shorter-term market opportunities might step in now to buy local equities, a greater number that remain overweight or were at target when the rally started could take the opportunity now to sell down to their policy allocation targets, noted Akihiko Ohwa, a part-time lecturer at Waseda University Graduate School of Finance, Accounting and Law, who stepped down in October as manager of Tokyo-based IBM Japan Ltd.'s pension fund.
Investment consultants likewise see little likelihood of renewed near-term interest in Japanese equities.
Only changes in medium- to long-term asset class assumptions would lead to noticeable asset allocation shifts, noted Taro Ogai, investment consulting director with Towers Watson K.K.
Meanwhile, even after reducing Japanese equity allocations over the past decade, most pensions remain overweight Japanese equities relative to global indexes, so it's tough to make the case that they should boost exposure even if Mr. Abe's administration enjoys some success in boosting economic growth, Mr. Ogai said.
Konosuke Kita, Russell Investments' Tokyo-based director of consulting for Japan, agreed, saying signs that Mr. Abe's policies are enjoying some success could potentially slow but not reverse the move away from equities.