TOKYO (AP) — Japan's $1.1 trillion public pension fund on Friday approved a plan to double its holdings of shares and cut back sharply on bonds to help improve investment returns and meet its obligations to a swelling number of retirees.
The much-anticipated decision came just a few hours after a surprise announcement by the Bank of Japan that it will increase its annual asset purchases to as much as 80 trillion yen ($725 billion) to shore up faltering growth.
Japan's stock benchmark had meandered this year while other major markets swept past record highs. But Friday's double dose of stimulus drove the Nikkei 225 stock index up 4.8 percent to a seven-year high of 16,413.76.
Prime Minister Shinzo Abe says moving tens of billions of dollars out of low-yielding bonds and into higher-yielding but riskier stocks is needed to ensure the fund can meet its future obligations to retirees. Japan is rapidly aging and its overall population is shrinking as birth rates decline.
The plan agreed to Friday will see holdings of bonds fall from about 60 percent to 35 percent. Holdings of shares will rise to about 50 percent, with half in domestic shares and half in foreign shares.
The plan also calls for the managers of the fund, the world's largest, to improve its governance and risk management.
The announcement from the world's largest public pension pool was made after stock trading closed and is likely to spark further gains Tuesday when markets reopen after a public holiday. After Friday's rally, Japan's share benchmark was at roughly half its peak of 38,915.87 reached in late 1989 before Japan's asset bubble burst and the economy slipped into nearly two decades of deflationary funk.
Critics of the shift in investment strategy question whether putting a larger share of the nation's nest egg into higher yielding investments will be worth the potential risks. Some also fret that the resulting run-up in share prices will be a form of window-dressing that may encourage executives to stall on overhauls that listed companies need to improve their financial performance.
"Many people depend on their pensions to survive," said Goshi Hosono, a former environment minister and leading opposition politician, said during parliamentary debate this week. "You are proposing shifting public pension investments into high-risk property, venture capital, private equity, commodities trading."
Abe retorted the government has proposed the change to "ensure we can pay as we have promised."
Abe's dilemma is one faced by many governments as they puzzle out how to fund pension payments that are surging as fewer younger workers replace retirees.
Within a decade, Japan will be spending an estimated 150 trillion yen ($1.4 trillion) a year on pensions, health and other social benefits, according to the financial newspaper Nikkei.
"Japan has no room to waste its limited resources and capital," Kunio Ito, a government adviser and professor at Tokyo's Hitotsubashi University, wrote in a massive report on efforts to improve the way companies use the money invested in them.
"Increasing capital efficiency in the broadest sense is crucial from the perspective of Japan's survival," the report said.
The pension fund says is most recent quarterly investment return was only 1.77 percent overall. The return on domestic bonds, which are being snapped up by the central bank as part of its massive monetary easing, was 0.72 percent. Stocks yielded a return of 5.1 percent. In the January-March quarter, the overall return was negative 0.8 percent.
The fund is among many institutional investors, such as major banks and insurers, that are pledging to take a more assertive role in persuading cash-hoarding Japanese companies to deliver better returns on their assets. That is one of a raft of changes needed to shape up Japan's huge but underperforming capital markets.
Even share investments yield relatively small returns: Japanese companies' average returns on equity are about half those in the U.S. and Europe.
In the long run, the changes in the pension fund could provide a solid boost to the stock market, said Masamichi Adachi, an economist at JPMorgan Chase & Co. and former central bank official.
But it will take time to change the mindset of Japanese executives whose main priority has long been to preserve their companies without rocking the boat.
"I take it rather positively in the medium to longer term, but in the meantime it is just a source of volatility," Adachi said.
In recent years, most individual investors have remained wary of equities trading and Abe has made only modest progress in drawing a larger share of the country's 1.63 quadrillion yen ($15 trillion) in private savings, most of which is parked in bank accounts and other cash holdings, into the share market.
Last year, foreign investors rushed into the Japanese market, buying into the "Abenomics" growth strategy aimed at vanquishing the deflation that has stymied growth and discouraged corporate investment for much of the past two decades. About a third of the value of all Japanese shares is held by foreigners.
Japanese individual and institutional investors meanwhile have been stepping up purchases of foreign stocks and bonds, seeking higher yields than what they can get at home.