On October 31 Japan’s central bank delighted the investment world by announcing a breathtaking increase in quantitative easing, a “Keynesian spending blowout”(1) that made Bernanke look like a piker. The Japanese stock market rose to a seven-year high and the yen fell to a six-year low. But in the real Japanese economy, nothing happened and nothing will happen.(2)
Somewhat lost in all the hoopla was another announcement, obviously “timed to maximize the impact of further monetary stimulus from the Bank of Japan,”(3), namely, that the Japanese Government Pension Investment Fund (GPIF) was altering its asset allocation strategy. The GPIF is, at $1.2 trillion, by far the largest pension fund on the planet, so when it changes course, people take notice. (By comparison, CalPERS, at $221 billion, is a minnow.)
You might suppose that when a pension plan alters its asset allocation strategy it would do so in a prudent and modest, incremental way. After all, the retirement security of millions of workers hinges on the trustees’ getting it right. But the world of fiduciary, common sense thinking is utterly foreign to the crassly politicized world the public pension funds live in. Here’s what GPIF did to adjust its asset allocation strategy:
Former allocation % Current allocation %
Japanese stocks……………………. 12……………………………………. 25
International stocks………………… 12……………………………………..25
International bonds………………….11……………………………………..15
Japanese bonds………………………60……………………………………..35
Cash…………………………………….. 5………………………………………. 0
There are only two possible explanations for this massive change:
* The original asset allocation strategy, in place for years, was wrong. If this is the case, and assuming Japan has an equivalent of ERISA, the trustees who were then managing the plan should be removed and surcharged. If there is no ERISA equivalent, the former trustees should be horsewhipped, as they have obviously been mismanaging the pension plan for years, to the serious detriment of millions of Japanese workers.
* The former allocation was right and the current allocation is wrong. This is the correct answer, because what is going on here is that, after years of pressure from the Abe regime, the GPIF finally caved in and adopted a strategy designed to reinforce current government policy, which was slowly sinking into the mire.(4) That’s nice for Prime Minister Abe, but it sucks for Japan’s government workers, whose future has just been mortgaged for short-term political purposes.
And that’s how not to adjust your asset allocation.
(1) Wall Street Journal, “Japan’s Wizards of Ease,” 11/1-2/14.
(2) But of course you already know this because I pointed it out long ago (see “From Hot Wars to Cold Wars to Currency Wars,” post of July 2, 2013). Abe’s famous, now infamous, “Three Arrows” actually made sense as a whole, but unfortunately the most important arrow – the one without which the others are merely quick ways to run up the country’s already unsustainable debt – won’t happen. That arrow, serious reform of the Japanese economy and labor market, is political poison.
(3) Financial Times, “Japan pension fund to lift stock holding,” 11/1-2/14.
(4) Following the first two of Abe’s “arrows,” (a) the Japanese economy contracted 6.8% in 2Q14, (b) economists are predicting all of 0.2% growth for FY 2014, (c) household spending is actually down, and (d) in a recent Tokyo Broadcasting System poll, nine out of ten Japanese felt that Abe was not improving living standards. This last might possibly be related to the fact that household incomes in Japan were 1% lower in September than a year earlier.
Next up: In Praise of Not Voting
[To subscribe or unsubscribe, drop me a note at GregoryCurtisBlog@gmail.com.]
Please note that this post is intended to provide interested persons with an insight on the capital markets and is not intended to promote any manager or firm, nor does it intend to advertise their performance. All opinions expressed are those of Gregory Curtis and do not necessarily represent the views of Greycourt & Co., Inc., the wealth management firm with which he is associated. The information in this report is not intended to address the needs of any particular investor.
