If Japan’s Prime Minister Shinzo Abe wonders about the cost of delaying vital reforms for six-plus years now, he has a Hungary-sized demonstration.
Japan’s Government Pension Investment Fund, the world’s largest of the genre, just posted a record $136 billion loss. That’s roughly equivalent to Hungary’s annual gross domestic product. With $1.39 trillion of total assets left, “The Whale,” as locals call it, could be the investment world’s biggest Abenomics casualty.
Ostensibly, GPIF fell victim to last quarter’s spectacular equities rout. The benchmark Nikkei 225 index alone lost 12% in 2018.
Yet it’s important to recognize how Prime Minister Abe’s policies aren’t just slamming the banking industry, but many a retiree in the world’s fastest-aging major economy.
Bulking up on stocks
In recent years, politicians, including Abe, encouraged “The Whale” to swim further out on the risk curve. Granted, years of zero-to-negative interest rates left GPIF with paltry returns. The Bank of Japan’s hoarding of government debt – it owns more than half of all outstanding securities – made the debt market a dead end for trading opportunities.
And it worked well, for a while. Boosting its allocation of stocks – to 24% of total assets – it generated healthy returns for the previous two fiscal years. But things went awry in the second half of 2018 as Donald Trump’s trade war slammed world markets.
Escalating Sino-US tensions probably have GPIF President Norihiro Takahashi wishing he’d allocated more than 28% of assets to Japanese bonds.
Abe, too, may be wishing he’d done more to power a Japanese stock rally organically, not through epic BOJ stimulus.
When he arrived in office in December 2012, the Nikkei was already rising. In the run-up to his election win, Abe declared that the last 12 years of muddling along were over. There’s a new reformer in town, he said, with a three-pronged plan to reflate the economy and rekindle Japan’s innovative fire.
The first two steps – massive monetary easing and fiscal pump-priming – set the stage for the big-bang reforms to come. Stocks rallied 57% in 2013 alone. But then 2014 came and went without the third and most important phase of Abenomics – structural change – being implemented.
Then came 2015. And 2016. And 2017. And then 2018 without clear and bold steps to catalyze a start-up boom, cut red tape, loosen labor markets, increase productivity and narrow the gender-pay gap.
Sure, Abe cheered investors with some moves to tighten corporate governance and increase the number of outside directors. But nothing potent enough to avoid scandals at Kobe Steel, Olympus, Takata, Toshiba and the palace-coup insanity unfolding over at Nissan Motor.
GPIF’s Hungary-sized loss has reminded us how fleeting Japan’s reflation high was.
Recent days brought a steady flow of disappointing news in exports, retail sales, wages and industrial production. Inflation is barely halfway to the 2% target, while America’s protectionist U-turn under President Trump has hobbled Asia’s export engines.
In retrospect, the Abenomics cynics had a point back in 2014, the year that GPIF made its fateful shift into stocks.
At the time, many warned stimulus-heavy Abenomics was treating the symptoms of Japan’s lost decades, not the underlying problems. And that prodding GPIF to load up on shares was part of the gambit, a kind of unofficial government support program.
One could argue that Trump’s White House is cascading down a similar road as Japan as it browbeats the Federal Reserve to stop tightening.
Just as China’s Xi Jinping derives legitimacy from rapid GDP growth, Trump sees surging stocks as his most vital currency. What’s to keep him from nudging the Fed to ease or tweaking regulations to boost Wall Street?
In Japan’s case, the Bank of Japan owns nearly 80% of exchange-traded funds. The odds of BOJ Governor Haruhiko Kuroda being about to withdraw from stocks, as he’d hoped, are virtually zero. Not with the pensions of many tens of millions of Japanese taking on water – and the national whale flailing in the shallows.