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Pension funds calm despite JGB jitters

By Barney Jopson, Financial Times

 August 25, 2003

Japan's pension funds have remained a pool of relative calm in recent weeks despite the volatility in Japan government bond (JGB) prices.

Funds have been helped by equity gains that have offset bond losses, as well the introduction of policies aimed at diversifying their investment exposure across different asset classes.

Banks, by contrast, which are under the eye of regulators and are highly sensitive to risk, have scrambled to sell bonds and cut their exposure to the market - in the process, exacerbating the instability.

"Certainly pension funds are not happy with falling JGB prices," said Tatsuo Mizutori, a director at Mercer Investment Consulting. "But with the equity market rising, overall they are in positive territory."

As bond prices have plummeted, first in a rout in late June and then again in the past week, equities have climbed and counterbalanced the pain.

"There is some selling to adjust JGB positions, but no dramatic changes to asset allocations," Mr Mizutori said. Investors focusing exclusively on JGBs could find reason to drop bonds, but funds with diversified investment strategies found it easier to accept losses, he said.

"Pension funds close their books in March," one trust bank fund manager noted. "We are not even halfway there at the moment, so there is not a great deal of worry."

In the retail sector, the rise in JGB yields is likely to stimulate individual buying of government debt, said Takashi Sakurazawa, general manager of financial products at Nikko Cordial.

The government began selling 10-year JGBs for retail investors in March, but the three issues launched so far have had interest rates close to their 0.05 per cent floor - and differ little from the fixed-deposit rate available at banks.

With 10-year yields at their present level Mr Sakurazawa says the next retail issue - with a coupon to be set in early September - could have a rate of 0.4 or 0.5 per cent. "I get the feeling that if the rate is set there a lot of retail buyers could emerge."

The government launched pre-packaged JGBs for retail investors to nurture a new source of demand for sovereign debt.

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