JAPAN - The Bank of Japan's decision to end its long-running zero interest rate policy, raising rates to 0.25%, could see pension funds rejig their asset allocation, accelerating the diversification of fixed income portfolios.
At its monetary policy meeting today, the BoJ decided by a unanimous vote to change the guideline for money market operations to “encourage the uncollateralised overnight call rate to remain at around 0.25%”. The hike marks the first rate rise in nearly six years.
Ian Kernohan, economist at Royal London Asset Management, said: “Structurally, pension funds are heavily invested in the bond market so over time, we’d expect the weighting to shift in favour of equities.
“From a cyclical point of view, the fact the Bank of Japan has begun to raise interest rates now is a negative for the bond market there so it does seem to be a good time to shift some assets out of bonds and into equities.”
Prior to the rate hike, Yoshinori Kouta, business leader of investment consulting Japan at Mercer, commented: “Recently there has been huge demand for diversification within domestic fixed income. The interest rate in the future will be higher so the performance [of bonds] will be less attractive compared to previous years. People have been already diversified into hedge funds or international fixed income with a 100% currency hedge into Japanese yen, and will keep these positions.”
Itsuki Sano, vice president and director, Japanese business development, at T. Rowe Price Global Investment Services’ Tokyo branch warned that sticking to government bonds as rates rise could see pension funds lose out.
“The base performance might be 1% but you are most likely to lose your asset value when interest rates go up,” he noted.
In a statement, the BoJ said: “The bank has maintained zero interest rates for an extended period, and the stimulus from monetary policy has been gradually amplified against the backdrop of steady improvements in economic activity and prices.
“In this environment, maintaining the previous level of the policy interest rate may result in large swings in economic activity and prices in the future. Today’s policy decision will contribute to ensuring price stability and achieving sustainable growth in the medium to long term.”
Fund managers in Japan suggested the move might further accelerate the trend to hedge fund investment, however Philip Whittome, portfolio manager at Investec Asset Management, previously told Global Pensions pension funds needed to treat their riskier assets with caution in the face of rising interest rates.
They should consider the extent to which the strength of “riskier asset classes” might have been driven by liquidity available globally, rather than by improvement of fundamentals, he cautioned.
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