State-affiliated pension fund takes gamble in emerging economies

Heeding the calls of the Noda administration, Japan's largest government-affiliated pension fund said it is aggressively investing in fast-growing emerging economies and is willing to take bigger risks for higher returns.

However, critics warn that such moves will only increase the danger of depleting funds intended to cover the future benefits of retirees.

The Government Pension Investment Fund (GPIF), which manages about 100 trillion yen ($1.27 trillion yen) in assets from the national pension program and the employees’ pension program, said on July 2 that it started taking a more aggressive approach to investments in late June.

Domestic bonds, which are considered relatively safe financial products, have represented about 70 percent of the GPIF’s total investment. The remainder has consisted of domestic shares, foreign stocks and foreign bonds, at 10 percent each.

The GPIF has not announced details of its new investments, such as their size or destinations, but it did say it is moving to buy a large number of shares in businesses in 21 countries, including China, South Korea and Brazil.

The GPIF’s foreign shares have generally involved companies in industrialized nations.

But Yoko Komiyama, the health and welfare minister, has urged pension fund managers to buy shares in emerging economies.

“We will lose the opportunity to make profits if we refrain from investing in expanding markets,” she told at a Diet session in May.

Since the Democratic Party of Japan came into power in autumn 2009, Cabinet members have asked organizations managing public pension funds to take a more aggressive approach to investing, hoping to replenish the rickety pension system with higher returns.

In 2010, Kazuhiro Haraguchi, then minister of internal affairs and communications who was in a position to appraise the performance of government-affiliated organizations, suggested investments in emerging markets.

But Akira Nagatsuma, then minister of health, labor and welfare, was lukewarm to the idea, saying the management of pension assets requires caution.

The GPIF said it decided to expand its portfolio into emerging economies based on discussions of a panel of financial and economic experts.