US will benefit most from Japan's pension fund reform

Yuriko Nakao | Bloomberg | Getty Images

U.S. assets will be the biggest benefactor of the Japanese Government Investment Pension Fund's (GPIF) decision to more than double its target allocation of foreign stocks to 25 percent, analysts say.

The changes to the $1.1 trillion pension fund coincided with the Bank of Japan's shocking decision to ramp up stimulus on Friday, which sent global equity markets soaring.

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"The shift for international equities going to 25 percent of pension fund holdings is fairly big news," said Tobias Levkovich, chief equities strategist at Citigroup in a note published on Friday.

"It establishes a new incremental buyer of shares and the U.S. should be a significant beneficiary," he said.

The overall contribution to non-Japanese stocks could approach $60 billion of new purchases, half of which could go to the U.S. by the end of 2015, said Citigroup's Levkovich, noting that stocks on Wall Street should start to feel the benefit this year.

"Foreign investors typically buy large cap stocks which have greater index impact," he said. "Thus, one cannot ignore the possibility that stock prices jump above our year-end 2014 S&P 500 target on this news."

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Other analysts agree.

"It's pretty realistic [that the U.S. will receive most of the benefit] if you look at where the Japanese feel comfortable investing their money," Uwe Parpart, managing director and head of research at Reorient Financial Markets told CNBC.

"This is a pension fund making the investment they are not going to punt into small caps or anything of that sort they need large, liquid stocks that over decades have had a reliable return," he said.

But Parpart is not convinced the inflows would make a huge difference to stock market performance.

"$30 billion sounds like a lot of money, but stretched over a period of time it's not going to move markets," he said. "But obviously it's a nice shot in the arm."

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Government bonds

Furthermore, an increase in the pension fund's international bond allocation to 15 percent from 11 percent should boost demand for Treasurys, driving further inflows into the U.S., analysts at HSBC said in a note published Tuesday.

Meanwhile, the GPIF will reduce is domestic bond allocation to 35 percent from 60 percent.

"The BoJ's increase in asset purchases should be more than enough to cover the aggressive reduction in Japanese Government Bond (JGB) holdings planned by the GPIF, allowing JGB yields to stay pinned down," said Andre de Silva, head of global emerging market rates research at HSBC.

"Ultra-low JGB yields imply that the relative valuations for other core rates ie. U.S. Treasuries and other bond substitutes have been further enhanced," he said. "Demand for yield-grabbing would intensify amongst Japanese investors, boosting overseas investments."

De Silva estimates that over $100 billion could be reallocated into foreign bonds as part of this trend and highlighted U.S. Treasurys as the most attractive for Japanese investors. France, Australia, India and Indonesia government bond markets are attractive alternatives, he said.

Japan's pension fund is under pressure from Prime Minister Shinzo Abe to shift funds to riskier, higher yielding investments to help boost returns, at a time when his Abenomics agenda appears to be running out of steam.

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