Imagine a policy that adds 1 per cent of GDP a year to the fiscal resources of a large, advanced economy. This policy works like magic. The money appears out of nowhere, with no rise in taxes, no cuts in spending, no assets sold and no debt to pay back. Such a policy would have great appeal to cash-strapped governments around the world and is surely too good to exist. Nevertheless, exist it does. Any guesses? The answer is a 2014 reform to the Government Pension Investment Fund of Japan, the world’s largest pool of retirement savings, in which it took on some currency and equity risk.
Undertaken by former prime minister Shinzo Abe, the 2014 reform shifted the GPIF from a largely domestic portfolio, with 60 per cent held in Japanese government bonds, to one that is 50 per cent equity and 50 per cent international. According to Stephen Jen and Joana Freire of Eurizon SLJ Capital, the portfolio has grown from ￥137tn in 2014 to ￥226tn today, compared with the ￥168tn at which it would now stand if the fund had kept it unchanged. The extra return amounts to about 10 per cent of Japan’s GDP, or $370bn, which must make it the most lucrative asset allocation review in history.
The portfolio has benefited, of course, from the weakness of the yen, which fell from roughly ￥100 to the dollar to roughly ￥150 over this timeframe, but that is the point of taking currency risk, not a lucky accident. A period of bad asset returns could wipe out some of the gains. This is, however, a policy experiment that the world should study. Here are six lessons.