July 10 (Reuters) – Japan is seeking to encourage its Government Pension Investment Fund, the world’s biggest pension fund, to boost investment in domestic assets, Finance Minister Satsuki Katayama said on Friday.
The fund owned 293.4 trillion yen ($1.8 trillion) in assets at the end of December, so its allocation decisions carry significant weight for global markets, and the announcement sent the yen and Japanese government bonds higher.
The yen edged up about 0.6% to 161.4 per dollar. Benchmark 10-year Japanese government bond yields made their steepest drop in a month, falling 10 basis points to 2.775%. [JP/][FRX/]
Here are market participants’ reactions:
RYUTARO KIMURA, SENIOR FIXED INCOME STRATEGIST, BNP PARIBAS ASSET MANAGEMENT, TOKYO:
“I view Minister Katayama’s remarks partly as comments aimed at restraining interest rates — in a sense, encouraging such market expectations — rather than as something with immediate practical effect. Today’s decline in (bond) yields reflects the fact that the earlier rise in rates had been quite rapid.”
EIICHIRO MIURA, SENIOR GENERAL MANAGER OF INVESTMENTS, NISSAY ASSET MANAGEMENT, TOKYO:
“The government has gone beyond verbal intervention and decided to take actions to contain the rise in yields and stem the yen’s weakness. It is not clear at all (about) the scale of the shift in assets but the move would be followed by pension funds in the private sector.
“The government probably wanted to prevent the 10-year JGB yield from rising to 3%. Japanese bonds became attractive as yields rose, but investors hesitated to buy … as they struggled to see how much more the yields would rise. The government wanted to turn this trend.”
FABIEN YIP, MARKET ANALYST, IG, SYDNEY:
“The pension funds are pretty large in size, so you can imagine if a structural tilt to how they are allocating assets …would definitely create a lot more inflows for domestic assets… so that’s supportive of the currency and at the same time also supportive of equities and bonds.”
MASAFUMI YAMAMOTO, CHIEF CURRENCY STRATEGIST, MIZUHO SECURITIES, TOKYO:
“I think that’s one of the ways to increase the demand for JGBs and also the yen.
“South Korea also came up with a plan to let the national pension fund to increase domestic assets, so I think it’s a similar method. I’m just wondering why it took so long to decide this.
“I don’t know how many percentage points they will try to increase the domestic assets and decrease the foreign assets … whether or not follow-through will come in the European and New York hours, we need more details about how much percentage points the GPIF can increase in domestic assets.”
FRED NEUMANN, CHIEF ASIA ECONOMIST, HSBC, HONG KONG:
“The big asset repatriation is the missing piece in Japan’s reflation journey. Despite rising interest rates locally, and a buoyant equity market, Japanese investors have shown little appetite so far to reduce their sizeable overseas holding and to return funds to domestic markets.
“At the margin this could help to anchor yen expectations, but fundamentally a further adjustment in Japanese interest rates is needed to Japanese investors to fully rebalance their asset holdings.
“Japanese officials will need to exert caution: a wave of asset repatriation could also push the yen into too strong a direction if a trickle turns into a flood. A challenging calibration process lies ahead.”
NORIHIRO YAMAGUCHI, LEAD JAPAN ECONOMIST, OXFORD ECONOMICS, TOKYO:
“It sounds like deja vu. Last December, as the Korean won came under depreciation pressure, the Korean government reportedly requested that the National Pension Service (NPS) to sell dollars. The timing suggests the Japanese MOF were hoping for an announcement effect on the FX market.
“While it will take time for any asset allocation changes to be implemented in reality, the announcement itself could have some impact on market sentiment. However, I doubt it will be enough to change the game given underlying fundamentals suggesting persistent yen weakness.”
MASAHITO SUGAWARA, SENIOR STRATEGIST, DAIWA SECURITIES, TOKYO:
“Katayama’s remarks helped reverse the selling trend of the Japanese government bonds and the yen.
“Now half of the assets of Japanese pension funds are invested in foreign assets. The market bet a possible shift of the asset allocation would be positive to Japanese assets.”
SIM MOH SIONG, FX STRATEGIST, OCBC, SINGAPORE:
“We need to see what is changing in terms of the allocation … from there you can work out the potential impact on the currency.
“Right now I think the market is taking it as a positive sign. Lately the yen has been weakening and the JGB market has also sold off and I guess (the government) are trying to figure out a solution to overcome this market volatility.
“I am not sure if this is a silver bullet, but it could work in helping to stabilise sentiment.”
($1 = 161.8700 yen)
(Reporting by Junko Fujita in Tokyo and Rae Wee and Ankur Banerjee in Singapore. Compiled by Tom Westbrook.Editing by Shri Navaratnam)
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