Japan’s Monetary and Market Merry-Go-Round

Over at the often contrarian and somewhat foreboding Zero Hedge (ZH), they have a report regarding their take on the recent Nikkei Review’s report that “the Government Pension Investment Fund (GPIF) and other public pensions sold approximately ¥1.8 trillion (US$17.4 billion) more in Japanese government bonds than they bought in the first three months of the year, fueling speculation that the GPIF may be rebalancing its portfolio sooner than expected.”

The ZH report is actually quite interesting, and definitely worth the read, especially at the bottom of the post there’s an attached 2012 article from James Shinn, Institutional Investor regarding the GPIF’s portfolio rebalance. It’s a firsthand account of the writer’s visit to GPIFs offices to discuss this pending portfolio rebalance that has been a hot topic and a policy agenda of the Abe government since he has held office.


The rebalancing is a major shift in strategy for GPIF, the world’s largest pension fund, who is famously conservative and infamously caught in a decades long bizarre love triangle between bureaucrats and politicians in Japan.

The GPIF strategy of sorts is fueled by their growing concern regarding Japan’s government debt addiction that sits somewhere around 200% of the country’s GDP. The strategy is to shift from Japanese Government Bonds (JGBs) to stocks, because apparently riskier assets are exactly what the doctor, or politician, ordered. Fair enough, the JGB market is dead anyway, so why dance alone among the graves… best get skipping!

Moreover, as mentioned here on this site, the Bank of Japan (BOJ)’s money printing, or quantitative easing (QE), has been creating quite the attractive environment for stocks, whether real or artificial, the market is moving up and Japan Inc. is capitalizing from it, so are investors, so why not Japanese pension funds, right?

The strategy itself is quite incredulous to many, me included, though. The BOJ becomes the largest holder of JGB—soon to be only—while the pensions in Japan dump JGBs to become some of the biggest stock market speculators in the world. Again, from a distance it’s seems understandable—inflation is on the rise, GPIF is in need of much more robust returns to stay ahead of inflation than JGBs can surely offer, and looking outside Japan’s borders for higher returns could be costly in regards to the FX trade, so naturally stay home and gamble in your own back yard… got it.

What isn’t so clear to many observers is how they will get off this merry-go-round after it’s in motion. To me, it appears to be an even bigger potential Ponzi scheme than social welfare itself. Once you turn this system on, how, or more importantly, who will have the political backbone enough to turn it off? Or is that just it… it can never be tuned off until it implodes?

As with most issues in government, the most outrageous laws, policies and agendas often seem like the easiest ones to turn on. They are also almost certainly cursed with unintended consequences, and extremely painful to turn off. Just look at the Iraq war in the US, as seemingly easy as a single presentation to turn on, but almost incredibly hellish to try and turn off. This is government at its best.

If ever the indication that the global investment community, and even governments themselves, disapprove or are fearful of all this QE and its purveyors it’s the gold market.

Gold may have been stuck in a channel between $1200 – $1400 an ounce over the past year or so, but it also hasn’t shown any vulnerability either. It’s in no way depreciating anytime soon as long as central banks keep propping up every single market in existence just to prolong the unsustainability of our ever increasing pensions and social welfare systems. In a world where the media persistently preaches about sustainability, it doesn’t seem like central banks and politicians give a hoot! This is why gold and precious metals may very well be the foundation of “smart money” for a very long time to come.

If the GPIF was a savvy investor, they’d be buying gold to hedge against their speculations in stocks, but when has a government ever been accused of being “smart money?”