Japan's Government Pension Investment Fund, Tokyo, is in “extreme danger” from investing mostly in local bonds with yields depressed by central bank buying, said Makoto Utsumi, who helped shape the world's largest retirement savings pool.
The Bank of Japan's asset purchase program has pushed yields abnormally low, said Mr. Utsumi, a member of an advisory panel on the 2006 establishment of the fund who is now president of debt-rating firm Japan Credit Rating Agency. GPIF, which held 58% of its ¥124 trillion ($1.2 trillion) portfolio in domestic bonds as of Sept. 30, will lose out on the chance for better returns by keeping them until redemption, he said.
“Holding bonds until maturity while the BOJ continues to intervene in markets means GPIF ends up with a huge amount of low-returning assets,” Mr. Utsumi said in an interview. Opportunity cost “is another type of risk. Is it right to settle on such low levels for the public's pension returns?”
Takatoshi Ito, head of a panel that advised lawmakers last year on overhauling Japan's biggest pension funds, said GPIF should sell now before the central bank reaches a 2% inflation target, which would boost yields and erode the value of the fund's bond holdings. Higher yields wouldn't mean losses as GPIF holds debt until it matures, GPIF president Takahiro Mitani said in response.
“There are big risks right now with Japanese government bonds,” Mr. Utsumi said. “It's just not right to simply say there won't be losses because you hold to maturity.”
The BOJ on Jan. 22 retained a quantitative easing plan in which it currently buys more than ¥7 trillion in bonds a month.
Japanese 10-year government bonds yielded 0.61% as of 3 p.m. in Tokyo on Thursday, the lowest in the world.
“We're in a new phase in Japan's economy, so it's necessary to look at risk again in a completely new way,” said Mr. Utsumi, who led Japan's currency policy from 1989 to 1991 as vice finance minister for international affairs. “I'm not going to simply say GPIF should just go and buy stocks. But when they review risk, they need to think about whether this abnormal monetary policy is going to continue for a while, and how monetary policy overseas is going to change.”