Japan Post shakeup could be big win for bond firms

Japan Post Bank Co. Ltd., a government-owned behemoth with assets of more than ¥200 trillion, is pursuing an extreme makeover of its institutional investment capabilities to grease the skids for its initial public offering later this year.

Managers of higher margin fixed-income strategies could be the main beneficiaries, analysts predict. But with each percentage point shift in the bank's allocations putting $17 billion of capital in motion, external managers will be on the lookout for even tentative moves into higher-risk market segments, those analysts say.

Taizo Nishimuro, president of parent company Japan Post Holdings Co. Ltd., Tokyo, announced on Feb. 18 the goal of recruiting a new, high-powered investment team this year, to be tasked with a top-to-bottom review of the bank's approach to investing its ¥205.3 trillion ($1.7 trillion) portfolio.

The traditional approach has focused on internal management of a portfolio dominated by holdings of Japanese government bonds — currently yielding next to nothing — and other low-risk investments.

Japan Post executives effectively have conceded the low-risk investment strategy that sustained a government-owned bank providing financial services to individuals through 24,000 post offices across Japan will prove less than ideal for a firm looking to sell shares to private investors by the end of the year.

For the first nine months of the fiscal year that will end March 31, Japan Post Bank reported a 0.97% return on its investments, up from 0.93% for the same period the year before.

For the moment, moving up the investment risk curve might be the bank's only option for boosting its appeal for investors.

As a public entity, Japan Post Bank is restricted from engaging in the bread-and-butter lending activities of private banks. With the government looking to retain at least a 50% equity stake at the bank's listing, that prohibition could remain in place for the foreseeable future.

Private banks will complain if they have to compete with a bank backed by the government, said one Tokyo-based investment banker, who declined to be named.

“For a while, our profits will have to depend on our activities as an institutional investor,” Mr. Nishimuro said at the Feb. 18 news conference.

With that in mind, the upgrade of Japan Post Bank's investment team and risk management capabilities, and the forging of a new investment policy will be “a crucial, core part of our "equity story' ... and an answer to the overriding concerns of investors about Japan Post Bank's low earnings,” he said.

Mr. Nishimuro declined to set targets for reducing the weight of Japanese government bonds in the bank's investment portfolio, saying he won't put any constraints on the judgments of the new investment team Japan Post Bank is looking to hire.

Japan Post Bank will look to assemble the core members of that new team as early as possible, with the goal of hammering out a new investment policy before the company's listing, he said.

But if the bank is poised to move out along the risk spectrum, it isn't looking to walk on the wild side. More high-powered investment and risk management capabilities should prove capable of boosting the bank's returns, but “we won't sacrifice our financial stability in pursuit of earnings,” said Mr. Nishimuro.

Analysts said they don't anticipate a move into high-octane asset allocation territory like the one underway at the ¥137 trillion Government Pension Investment Fund, Tokyo. Last year, the GPIF slashed its target for Japanese government bonds to 35% from 60%, and more than doubled its equity target to 50%.

Considering the bank's much shorter-term liabilities, even a 10% equity target would be quite challenging, said Sadayuki Horie, a senior researcher in the financial technology and market research department of Tokyo-based Nomura Research Institute.

Mr. Horie said he doesn't see “any kind of big change” from the current portfolio's fixed-income orientation following the bank's listing, although there might well be a continued, gradual move into foreign bonds, including investment-grade credit and high yield.

The bank's latest asset allocation figures suggest the shift from Japanese government bonds into foreign securities is already well underway. As of Dec. 31, the bank's holdings of Japanese government bonds accounted for 53.5% of its portfolio, down from 65.4% the year before. While the bulk of those funds ended up in short-term bank deposits, the bank's holdings of foreign securities — bonds as well as stocks — jumped to 14.7% from 10.6%.

A Japan Post Bank spokeswoman said the bank doesn't break out the bond and stock totals in the foreign securities category. Likewise, she declined to say what portion of the total was internally or externally managed.

But Tokyo-based executives with global money managers say they've been benefiting from the bank's growing offshore allocations.

Japan Post Bank has extended more mandates to managers of offshore bonds since the global financial crisis, first to strategies that invested in sovereign bonds but more recently to credit, including high yield and bank loans, as they chase margins, said the Tokyo-based head of one global money manager, who declined to be named. In March, 2009, as the global economy began its rebound from the crisis, Japanese government bonds accounted for 80% of the bank's portfolio, with a scant 0.75% in foreign securities.