Despite the recent reversal of expected flows to EU bonds from Japans unprecedented monetary easing, developments in Tokyo might yet lead to big inflows to Europe from Japanese institutional buyers. This, according to Kevin Gaynor, global head of asset allocation strategy at Nomura, is because of the recent decision by Japans $1 trillion Government Pension Investment Fund (GPIF), the worlds largest public pension fund, to tweak its asset allocation, increasing allocations to both foreign stocks and foreign bonds.
The move was made under pressure from prime minister Shinzo Abe in an attempt to quell the recent volatility in the Nikkei following the introduction of unprecedented monetary easing in April.
"The government pension fund announced a change to its allocation recently at the margin more into equity and foreign debt," Gaynor explains. "It wasnt huge, but the message is clear. Japanese pension funds are therefore going to be buying more EU bonds, US treasuries, and emerging markets. This will be meaningful for Europe."
Kevin Gaynor, global head of asset allocation strategy at Nomura
GPIF will cut its allocation to domestic bonds from 67% to 60% of its ¥112 trillion ($1.17 trillion) total assets and will boost holdings of domestic stocks from 11% to 12%. The allocation to foreign stocks will rise from 9% to 12% and to foreign bonds from 8% to 11%. Gaynor explains that the move is important because so many Japanese pension funds use the GPIF allocation as their benchmark. "Asset allocation at Japanese pension funds is slow moving," he says. "As such if an asset class rallies, they will sell into it in order to get back to the benchmark weighting. There have been some flows from pension funds, but most are looking toward anticipated asset allocation adjustments in the second half of the year."
The recent volatility in the Japanese government bond market might also act as a catalyst for inflows. The yield on the benchmark 10-year bond fell to a record low of 0.315% following the Bank of Japans announcement of its new monetary policy in April, but by May 23 it had risen to 1%. In June it was trading at around 0.8%.
"The volatility in JGBs has spooked investors," Gaynor tells Euromoney. "It has led to a lot of losses, which has made investors in Japan nervous. There have been various broker meetings with the BoJ and dealing desks the BoJ cant ask the banks to get behind this if they are losing money." Japanese banks are certainly under risk management pressure from their losses on JGBs, and appetite for duration has fallen. Many investors are consequently switching out of long-duration JGBs for shorter-duration bonds in Europe.