September 6, 2010

JAPAN: Fund sell-off to help Japan's elderly

LONDON, England / The Australian / Asia / Business / September 6, 2010

By Leo Lewis, THE TIMES Asia Correspondent

Elderly people work out with wooden dumb-bells in the grounds of a temple in Tokyo.
Picture by AFP Source: AFP

JAPAN'S colossal 117 trillion yen ($1.5 trillion) Government Pension Investment Fund is poised for an unprecedented asset sell-off. The move comes as the country heads towards a potential retirement crisis.

Over the next few months the largest pension fund in the world will liquidate more than Y4 trillion of assets to make its required payments to pensioners as the country's army of baby boomers finally hits retirement age.

However, driven by a growing desperation to meet its payout obligations, the conservatively managed GPIF is also considering a radical change of tack.

It is studying whether it should divert at least a portion of its huge asset base towards higher-risk venture capital-style investments, unlisted companies and higher-yield infrastructure projects at home and abroad.

As with a much smaller asset sale last year, the fund is expected to draw down its vast holdings of government and government agency bonds - a 70 per cent holding that dwarfs its investment in domestic and overseas stocks.

Bond and equity dealers said it was difficult to predict exactly when the asset liquidations would hit the market, but even their prospect has cast a shadow over Tokyo's trading floors.

The liquidation marks the arrival of a watershed that Japan has dreaded for years and that some economists believe could trigger a fiscal crisis before the end of the decade.

Japan has long known that the imbalance of an ultra-low birthrate and world's highest life expectancy would catch up with institutions such as the GPIF that depend on a constant flow of new money at one end and solid yields on assets at the other.

The country has not got enough young people to support its swelling population of retirees, now that nearly a quarter of the country is over the age of 65.

Assets have not yielded strongly, either: Japanese government bond yields remain resolutely low despite long-term concerns over the country's 200 per cent debt-to-GDP ratio.

Pressure has mounted on the fund to alter its investment profile after its investment returns dived into the red during the April-to-June period of this year.

The fund made losses of Y3.65 trillion in that quarter alone as Japanese stocks performed dismally and overseas assets crumpled in the shadow of Greece's fiscal meltdown.

The generation of Japanese born between 1947 and 1949 was numerically the largest the country has seen. As its members - 6 per cent of the overall Japanese population - have advanced inexorably on the retirement age of 65, more and more alarming predictions of Japan's inability to cope have emerged.

As well as the likely inadequacy of many public and private sector pensions, there are fears that health and welfare systems will buckle under the same strains.

"Insurance premiums rise little by little every year, but it isn't catching up with the increase in payouts," Takahiro Mitani, president of the fund, said.

He was "very concerned" about Japan's fiscal position: "If the government takes no action, there's no doubt that the nation's finances will become unbalanced sometime in the future."

Copyright 2010 News Limited
Seniors World Chronicle adds:
Leo Lewis, The Times' Asia business correspondent, has become China correspondent based in Beijing.