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Dramatic change is coming to one of the conservative cornerstones of modern Japan. Since the Meiji Restoration the trains have run precisely on time, the sakura cherry trees have blossomed on cue in early April, and Japanese citizens have placed the bulk of their savings in stodgy government-controlled pension funds, which in turn invest in Japanese government bonds (JGBs).

I noticed the pink buds of Prunus serrulata, or Japanese cherry, from the window of the Shinkansen that brought me from Kyoto to Tokyo to interview the president of Japan’s Government Pension Investment Fund, the world’s largest pension plan. My bullet train left Kyoto and arrived in Tokyo exactly on time. But the GPIF, a onetime pillar of conservatism, is no longer simply shoveling funds into JGBs.

“The GPIF is a big whale in a small lake,” says a longtime Japanese macro fund manager who deals with the Bank of Japan every day and spoke on condition that his name not be used. “In just six months they moved ¥8 trillion ($67 billion) from Japan’s bond market into other assets. This is the biggest politically driven portfolio shift I’ve ever seen, and they pulled it off without roiling these markets.” Not that he was complaining; like many other portfolio managers, he had been long the Nikkei 225 index and short the yen for the past 18 months, earning a tidy profit on both sides of the trade.

The GPIF is diversifying at a pace that’s astonishing for a fund of its size: With ¥131 trillion in assets, it’s more than three times bigger than the California Public Employees’ Retirement System and more than $200 billion larger than Norway’s giant Government Pension Fund Global, the world’s biggest sovereign wealth fund. In the last six months of 2014, while slashing its JGB holdings, the fund increased its exposure to Japanese stocks by ¥5 trillion, to foreign equities by ¥7 trillion and to foreign bonds by ¥4 trillion.

This colossal rebalancing looks set to continue to ripple through asset markets. How much more money will move and how much longer it will move are questions of great interest to any investor with exposure to Japanese stocks, the JGB market and the yen’s exchange rate against the dollar and other currencies.

To get a better understanding, I went to GPIF in late March to interview the man behind the fund’s dramatic reshaping: president Takahiro Mitani.

GPIF’s offices are surprisingly modest for such a financial leviathan. They are housed on the second floor of a gray office building in Kasumigaseki, the government district just south of the Imperial Palace. There is no receptionist, and employees — fewer than 100, a legacy of the days when GPIF did little more than buy JGBs — sit at metal desks in an open-plan office space.

Mitani-san greeted me in a conference room, looking remarkably calm and collected for a man who had navigated his way through three years of bruising politics to transform the fund’s investment mandate. He was rumored to be on his way out. Maybe that’s why he’s so relaxed, I thought.

Last year the fund’s investment advisory committee — acting partly at the behest of the government, which appoints several of its members — endorsed sweeping changes to GPIF’s portfolio allocation, setting new targets of 35 percent for domestic bonds, 25 percent for domestic equities, 15 percent for foreign bonds and 25 percent for foreign equities. By comparison, actual allocations were 67.4 percent, 11.1 percent, 8.4 percent and 10.1 percent, respectively, with the rest in short-term assets, at the end of 2011, just before the fund started to diversify. After last year’s changes the fund still held 43.1 percent of its assets in domestic bonds; it had lifted its allocation to Japanese stocks to 19.8 percent, foreign bonds to 13.1 percent and international stocks to 19.6 percent.

Mitani and I went back and forth in a combination of English and Japanese. I kept careful mental track because the numbers were large, and even after 40 years of speaking and working in Japanese, the translation can be tricky: The counting units for large numbers are 10,000 (ichi-man) and 100,000,000 (ichi-oku). Combined with an exchange rate of roughly ¥120 to the dollar, it can make the ends of your hair hurt.

I asked Mitani to explain the logic behind the shift in the portfolio.

“Our committee examined various sets of asset allocations which met the necessary rates of return in two macroeconomic scenarios, an upside and a downside case, and analyzed these with multiple risk metrics,” he told me. “This diversification strategy was authorized by the Ministry of Health, Labor and Welfare,” the government department to which GPIF reports.

By “necessary rate of return,” Mitani meant a new portfolio return bogey of 1.7 percent, up from 1.1 percent, recommended by the advisory committee. As the advisory committee explained at the time in its report, “Japan’s public pension scheme is basically managed as a pay-as-you-go system, where the contributions paid by working generations support elder generations. Given decreasing birthrate and ageing population, funding the pension benefits solely by the contribution from working generations would unduly weigh on them, thus the fiscal plan was drawn up to use [GPIF] to fund the benefits to later generations.”

In other words, GPIF — like almost every other institutional investor on the planet — is now reaching for yield. And this reaching for yield is an important cog in the machinery of Abenomics.

Investors around the world have been closely following Japan’s markets since the end of 2012, when Prime Minister Shinzo Abe took power and embarked on his ambitious, and untested, reform program aimed at lifting the economy out of its long deflationary slump. Abenomics’ first two policy arrows, fresh fiscal stimulus and a massive new round of bond purchases by the Bank of Japan, have given a modest boost to the economy and a bigger bump to the stock market. The benchmark Nikkei 225 has surged by 130 percent since mid-­November 2012, when Abe ignited a rally with his campaign pledge to reflate the economy.

“I’m bullish on Japan in 2015 for five reasons,” said Masaaki Kanno, chief Japan economist at J.P. Morgan and a former BoJ official, as he sized up Abenomics for me. “The global economic conditions are favorable, and real workers’ income is going to rise by about 1.7 percent for the first time in quite a while. Manufacturers are starting to respond to the weaker yen, we are making progress on corporate governance reform, and the BoJ is giving full support to raising asset prices. GPIF and public pension money is flowing into equity and foreign asset markets.”

Those flows seem likely to continue for some time yet. The pension fund is still some ways from its new allocation targets, and those targets, in turn, are the midpoints of fairly wide ranges. “The GPIF new target for domestic equities is 25 percent, but there is no reason they would necessarily have to stop there,” Kanno notes. “The new guidelines give them the latitude to go as far as 30 or even 34 percent.”

Yet plenty of skepticism persists about the ultimate success of Abe­nomics. My old friend John Greenwood, London-based chief economist at asset manager Invesco and a longtime scholar of Japanese macroeconomics, explains one of the reasons: “Despite the Bank of Japan’s balance sheet doubling in size since March 2013, commercial bank balance sheets and M2 have only expanded by 6 or 7 percent since then, or 3 percent per annum, which implies nominal GDP can only grow by 1 to 2 percent per annum after allowing for velocity changes.”

The third arrow of Abenomics, structural reform, is arguably the most important part of the program but is also the most difficult to pull off. The reforms include measures designed to encourage investment; increase labor participation, especially among women; and enhance productivity. The government is counting on GPIF to help propel the third arrow by increasing its holdings of Japanese equities and using its clout as a shareholder to push for better governance and improved performance at the country’s leading companies. This raises knotty political questions about the appropriate risk-and-reward profile for a public pension fund, how to best tactically manage the portfolio that is selected and how much the fund should be an instrument of government economic policy.

“With all three Abenomics arrows, we are engaged in a giant economic experiment that nobody has ever tried before,” confides a Japanese economist. He cut his teeth as an official in Kasumigaseki before moving to a lucrative job in Tokyo’s Marunouchi financial district, and like many of my interlocutors he is reluctant to go on the record with doubts about the government’s strategy. “All these policies have to fit together in just the right way: the fiscal stimulus, the quantitative expansion, the deregulation and structural reforms to enhance productivity,” he says. “Then we have to end them in just the right sequence, with a higher consumption tax for fiscal consolidation and a tapering by the BoJ. The GPIF is part of that machinery.”

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