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ANALYSIS-Japan pension fund moves may hit stocks, JGBs, buoy yen

Published 04/07/2009, 04:27 AM
Updated 04/07/2009, 04:32 AM
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* State pension fund GPIF seen slowing stock, bond buying

* Such buying had underpinned Nikkei, hurt yen

* JGBs seen at most risk from GPIF pull-back

By Masayuki Kitano and Chikafumi Hodo

TOKYO, April 7 (Reuters) - Japan's $1.5 trillion state pension fund is likely to cut back its purchases of domestic stocks and foreign bonds this year, removing a key source of support for the Nikkei but providing some relief for the sliding yen.

With a major portfolio rebalancing out of the way, the Government Pension Investment Fund (GPIF) -- the world's largest pension fund -- is expected to buy fewer assets within Japan and abroad, and may even need to sell them as pension payments rise.

One of the biggest risks is for the Japanese government bond market <0#JPTSY=JBTC>, which is about to see a big increase in issuance to fund fiscal spending just as GPIF's buying is expected to fade.

GPIF was seen as one of the main drivers behind recent capital outflows from Japan that surprised the currency market with their size and persistence, analysts and traders said.

Its portfolio rebalancing between October and March was cited as an important market factor, helping the Nikkei <.N225> hold above a 26-year low hit in October and likely playing a role in the yen's broad slide to six-month lows versus the dollar .

"It was huge that there was buying by public funds," said Toru Tanaka, senior manager for Mitsubishi Corporation's treasury and foreign exchange office in Tokyo.

"That did a lot to set the stage for the yen's fall to 99 to the dollar. If you can no longer hope for that to appear, it will be a positive factor for the yen," Tanaka said.

Such buying was aimed at re-balancing its portfolio to keep its asset holdings in line with its pre-set target ranges, analysts said. After global stock markets slumped, it needed to buyg overseas and domestic equities as its relative exposure to those asset classes shrank.

GPIF may have to dish out more money than it receives this year as more of Japan's baby boomers retire and begin receiving pensions, potentially leading the fund sell assets to raise cash.

The GPIF had earmarked 9.5 trillion yen for financial market investment in the year to March 2009. But starting this month, it will no longer have as much funding, as loans being paid back from semi-government entities and other public entities dry up.

"In general, the GPIF is not expected to sell or buy actively in stocks and foreign securities during the new business year," said Takahiro Tsuchiya, a strategist at Daiwa Institute of Research.

BIG FLOWS

The giant pension fund is estimated to have bought 2.2 trillion yen to 3.3 trillion yen ($22-33 billion) in overseas equities between October and March and is believed to have stepped up its buying as markets tumbled following the collapse of Lehman Brothers in September, analysts said.

GPIF, which holds five times the assets of the world's No. 2 fund, Norway's Government Pension Fund Global, probably bought another 2-4 trillion yen ($20-40 billion) in domestic equities in the past six months, they said.

"It is hard to identify who the new willing buyer to replace GPIF will be," said analysts at Macquarie Securities in a research note.

Takahiro Kawase, president of the GPIF, told Reuters in an interview in February that the fund may become a seller in the market rather than being a constant buyer, but added that the size of such sales would be limited. [ID:nLC817273]

Japanese investors have surprised analysts with their enduring appetite for overseas assets that has persisted even after the yen skyrocketed and stock markets plunged late last year as investors fled from risky assets.

Japanese investors flocked to overseas assets even in February, confounding expectations that they would bring money home ahead of their book closings in March and contributing to the dollar's 8.5 percent jump against the yen in February -- the biggest gain in 13 years.

For a graphic on Japanese foreign asset purchases and the yen, click on: http://graphics.thomsonreuters.com/apr09/AS_MKTS40409

With the GPIF's estimated overseas equities buying in the last six months amounting to monthly buying of roughly 370 billion yen to 550 billion yen, a slowdown or disappearance of such flows is likely to be felt across markets.

"I think that will lead to a situation where pressure on the yen to weaken will be very weak, and the pace will be very slow," said Koji Fukaya, senior currency strategist for Deutsche Securities.

In the Japanese government bond market, many fund managers are concerned about the possibility that heavyweights like GPIF won't allocate fresh funds at a time when already hefty supply is rising to fund fiscal spending.

"If GPIF actually decides not to roll-over its JGB positions and refrain from buying new JGB issues, this will certainty have an effect on the market," said Masaru Hamasaki, senior strategist at Toyota Asset Management.

GPIF could sell Japanese bonds and buy domestic and overseas stocks to try to further re-balance its portfolio, but analysts say that seems unlikely, adding that there are few signs that it has conducted such active rebalancing so far.

The GPIF is expected to draw up a new model portfolio later this year, but analysts see few changes to the current one. The current model gives a 67 percent allocation to domestic bonds, 11 percent to domestic stocks, 9 percent to foreign stocks and 8 percent to foreign bonds. ($1=100.60 yen) (Graphic by Catherine Trevethan; Editing by Eric Burroughs & Kim Coghill)

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