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Minister on Pension Fund Reforms

Japan has one of the fastest aging populations in the world. People are worried whether public pension can support them when they retire. Government officials hope to calm these concerns by improving profits of how the pension fund is invested. The Government Pension Investment Fund, or GPIF, is an independent administrative body that manages the public pension fund. It's a national nest egg worth more than 1.2 trillion dollars.

The GPIF has been putting 60 percent of its investments in national bonds. Another 12 percent goes into domestic stocks.

But the body has unveiled a new investment strategy last month. The policy of keeping a relatively large amount of holdings in Japanese government bonds will change. Under the new strategy, the GPIF will reduce its holding of domestic bonds, including JGBs, to 35 percent. At the same time, it will nearly double the holdings of both domestic and overseas stocks to 25 percent each.

The person in charge is welfare minister Yasuhisa Shiozaki. He spoke to NHK WORLD's Senior commentator Akihiro Mikoda about how the government is reforming the public pension system.

Mikoda: You've approved a change in investment strategy. There'll be fewer bond holdings and more stocks. That's a big shift in portfolio. Why?

Shiozaki: Prime Minister Abe attended the World Economic Forum in Davos, Switzerland this January. Around that time, he started reviewing the Government Pension Investment Fund's portfolio. He announced to the international community some forward-looking reforms. That set in motion the reevaluation of fund's investment plan.

Thanks in part to Abe's economic policies, the Japanese economy is emerging from its recent period of deflation. New investment plans have been put together with the aim of securing funds for the national pension and ensuring citizens can get their promised benefits. The plan is based on the assumption that the Japanese economy will grow at a gradual rate along with inflation.

In the past, wages decreased under deflation, but that situation has changed. The rate of increase of nominal wages plus an extra 1.7 percent comes out to close to 4 percent. So we have to try for a yield of about 4 percent. A government bond offers around 0.5 percent at the moment. So there's no way to get a 4 percent increase from bonds alone.

Mikoda: You've said this reform is a key element of the Prime Minister's economic policy. How does the GPIF contribute to growth?

Shiozaki: This February, the Financial Services Agency decided to apply a principle called the "stewardship code" to institutional investors. The GPIF announced that the institution itself will also have to abide by this principle.
That means the GPIF will have constructive talks with corporations that the fund invests in. That will increase corporate value. As a result, the national pension fund's investments will help to maintain a healthy economy.

Mikoda : Investors seem to have welcomed the change, we've seen stocks rise. But critics argue it's just the fund inflating prices. How do you respond to that?

Shiozaki : The pension fund's investments serve the sole purpose of benefiting the people who receive pensions. As a matter of fact, using the fund in any other way is prohibited by law. It's possible the assumption that pension reforms will yield positive economic effects could have an impact on stock markets. But that isn't our goal at all.

Mikoda : Before you became the welfare minister you said a portion of the fund should be invested into venture firms, and sectors that are expected to grow, and in turn that would boost the economy. Do you think the reform will increase investment in these sectors?

Shiozaki : The basic portfolio proposed by the GPIF, gives an upper limit of 5 percent investment in infrastructure and private entities such as ventures. This is the first time there's ever been an upper limit has put in place. It has of course been implemented to strengthen the risk-management framework. The GPIF made it clear that this is being done. So venture and infrastructure [investments] can be included. I believe that the GPIF will think about next steps very carefully. In any case, I think that if all this results in a positive growth cycle for the economy that will benefit people receiving pensions.

Mikoda : Some people are worried about the change. If the stock market crashes, for example, they wonder if they'll ultimately receive less pension payouts, or if premiums will go up. What would you tell these people?

Shiozaki : How can the government ensure citizens can get the pensions they are expecting? The best way to achieve this goal is with a broad range of investments. Diversity provides minimum risk and helps secure interest gains. Diversification of investments deals with different stocks and bonds, with prices that move in different ways, independently of one another. We ensure that the funds offset each other, thereby reducing risk. I think it would be good if people thought of it that way. We must lower our risk as much as possible by doing this, and still achieve our return. That must be our focus.

Mikoda : The government is considering reforming the fund's governance. What needs to change?

Shiozaki : What is important is to create a system of governance, or of internal checks and balances. That will allow employers within the organization to check with one another so no one can make an independent decision without the consent of others. It is also important that a decision-making body can oversee the body that executes its decisions. We also aim to improve risk management. We don't want people to make investments blindly, without fully understanding economic conditions at hand. So I think the GPIF needs to increase the number of fund managers with a deep understanding of the macro-economy.

Mikoda : The GPIF reform plans are drawing a lot of attention from abroad, too. What kind of message do you want to send as the person in charge?

Shiozaki : I have visited many parts of the globe. The portfolio of Japan's public pension fund must be diversified in order to meet global standards. It is also important to increase returns, while managing risks. If we can do that, we could also strengthen the Japanese economy as a whole. The international community is watching whether Japan can do this, or hoping that it will. Whether or not Japan can reform its pension system will be seen as an indicator of whether Japan can revive its economy. We must make sure that citizens in the future can receive pension payouts. That's what the GPIF must put its focus on.

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