Japan Post Bank plans $60 billion boost to alternatives investments over next 3 years

Japan Post Bank will boost its combined allocations to private equity, real estate, hedge funds and private debt by roughly ¥7 trillion ($64 billion) over the coming three years to offset an expected decline in yields on the Tokyo-based bank's vast holdings of Japanese government bonds.

The ¥207.7 trillion bank's medium-term management plan for the three years through March 31, 2021, released last week, targets ¥8.5 trillion in alternatives investments by the close of that period, up from ¥1.6 trillion as of the March 31, 2018, close of its latest fiscal year.

A JP Bank spokesman declined to provide precise figures for the bank's targets for each category of alternatives, but a bar chart in the management plan pointed to investments of roughly ¥3 trillion to real estate, ¥2.2 trillion to private equity, ¥2 trillion to hedge funds and ¥1.3 trillion to private debt.

As of March 31, the bank reported ¥900 billion in hedge funds, ¥500 billion in private equity and ¥300 billion in real estate.

The medium-term plan pointed to incremental additions to the bank's huge allocations to foreign bonds, which stood at ¥57.6 trillion at the end of March.

The latest allocation targets point to an increased reliance on alternatives to power the Tokyo Stock Exchange-listed bank's earnings, with the combined ¥8.5 trillion total expected to come to 4% of its portfolio.

Katsunori Sago, the ex-Goldman Sachs Group (GS) executive who built the bank's investment team over the past three years, said in an interview with Pensions & Investments in early 2017 that allocating 3% of Japan Post Bank's portfolio to alternatives would be sufficient.

Earlier this month, Japan Post Bank announced that Mr. Sago, the representative executive officer, will retire around mid-June. Tokyo-based Softbank Group announced Mr. Sago will become a member of the firm's board of directors.

According to the medium-term plan, alternative allocations are expected to deliver 11% of the bank's net interest income, up from less than 1% for the latest year.

The bank's foreign credit holdings will contribute 63% of net interest income, down slightly from 64% for the fiscal year ended March 31.

Japanese government bonds and related instruments are expected to account for just more than a quarter of net interest income, down from 36% for the latest fiscal year. Their weight in the portfolio, meanwhile, will fall to 55% from 61%.