Asian bonds fuelled by Japan's ageing population

Japanese pension funds' need for higher returns sees billions pumped into overseas investments

PUBLISHED : Thursday, 03 July, 2014, 2:08am
UPDATED : Thursday, 03 July, 2014, 2:08am

Asian bonds are reaping the benefits of Japan's ageing population like never before.

Record amounts of Japanese cash are flowing into the region's fixed-income markets as the demands of the world's oldest population force the country's pension funds to load up on higher-yielding assets overseas.

[It] should be positive for pretty much all of Asia’s financial markets

Japan's US$1.3 trillion Government Pension Investment Fund (GPIF), the largest globally, said it was cutting holdings of local bonds that offer the world's lowest yields and seeking better returns abroad to meet mounting payouts. Nomura Holdings estimates such funds will pump about US$200 billion into overseas bonds and stocks, purchases that will shield Asian assets against capital outflows as the United States Federal Reserve dials back stimulus.

"The moves by the GPIF and other public pension funds should be positive for pretty much all of Asia's financial markets," said Thiam Hee Ng, a senior economist at the Asian Development Bank in Manila. "Japanese investors have traditionally been quite conservative. We'd expect that they would focus their investment on the more developed and high-rated markets in Asia like Korea, Hong Kong or Singapore."

Investors in Japan boosted their bond holdings in the rest of the region by 399.5 billion yen (HK$30.5 billion) this year to April, the biggest increase in Ministry of Finance data going back to 2005. Singapore received a record 163.1 billion yen, followed by Hong Kong's 74.6 billion yen and Malaysia's 70.9 billion yen.

Asia's sovereign bonds returned 5.5 per cent this year, outpacing the 1.5 per cent gain in Japanese notes. The region's corporate debt handed investors a gain of 5.5 per cent, compared with 0.8 per cent on Japanese bonds, according to Bank of America Merrill Lynch indices.

Japanese pension funds including the GPIF accelerated net sales of domestic government bonds to 1.85 trillion yen in the first three months of this year, the most since the second quarter of 2012, central bank data showed.

The GPIF's reshuffle will raise its target for holdings of overseas bonds to 14 per cent of assets from 11 per cent, and that for foreign stocks to 17 per cent from 12 per cent, according to projections in a survey of 10 fund managers and analysts. The ratios were 11 per cent and 15 per cent at the end of last year, respectively, according to the fund's website.

The GPIF's new portfolio would be adopted by three other public funds managing a combined 28.8 trillion yen.

About one in four people in Japan were 65 or older, the highest-ever ratio, an Internal Affairs Ministry report showed in January, and its birth rate was the fourth-lowest among member nations of the Organisation for Economic Co-operation and Development.

Increasing payouts are pressuring the GPIF to improve returns that averaged 2.8 per cent in the nine years to March 2013. That compares with 5.2 per cent for Norway's Government Pension Fund Global and 7.3 per cent for the California Public Employees' Retirement System, the biggest managed US fund.