Legal & Regulatory

Japan decides not to lift the ban on GPIF investing directly in stocks

February 18
10:05 AM 2016

Japan's trillion-dollar pension fund has faced opposition from the ruling Liberal Democratic Party (LDP) in terms of directly investing in the Japanese stock market. The ruling party announced on Tuesday its decision to retain the ban on direct stock investment by GPIF. The chief factor of resistance lies in the fund's power over corporate management.

According to FirstPost, the Government Pension Investment Fund (GPIF) had ¥135 trillion ($1.18 trillion) under the management. The Japanese government was contemplating whether to allow GPIF to make direct investments by deregulating the governing rules. However, the fund made a conscious decision to move away from domestic government bonds, which had made up the majority of its portfolio and, instead, shift gears towards the asset management firms. However, till now the GPIF operated through these firms, but now it wants to move towards direct stock investments, for which it has been seeking the nod of approval from the federal authorities.

As The Japan News states, the decision to not lift the ban was made at an LDP meeting focused on pension issues, based on which the welfare minister will put together a bill on corresponding reforms. The bill will introduce a collegial decision-making system routed via an executive committee, which would adversely impact the fund president Takahiro Mitani's powers. At the same time, it would include the necessary lines to keep the GPIF ban in place.

The hostility became evident after Prime Minister Shinzo Abe made a statement regarding shrinking pension benefits should the government fund incur losses on its investments, as per The Japan Times. In response to a question from the Democratic Party of Japan at a House of Representatives Budget Committee meeting, Abe had said, "Payments will naturally be affected if the expected profits are not generated. If the situation does not allow benefit payments, they will need to be adjusted." But Abe had also emphasized that as the GPIF asset management performances are evaluated on a long-term basis, the pension schemes do not reflect the immediate losses and gains.

The stakeholders in this decision clearly had divided opinions. The Japan Business Federation and the Japanese Trade Union Confederation were against lifting the ban. Their argument was that the government fund would gain direct control over the private companies. On the other hand, the stock market investors favored the removal of ban, anticipating higher prices and advantages like a decrease in the GPIF commission fees for stock investments. The LDP made the final call on Monday after pension reform subcommittee of the Social Security Council, advisor to welfare minister, failed to reach a unanimous decision on the removal of ban on GPIF.

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