The Bank of Japan’s surprise move to boost its stimulus programs wasn’t the only news out of Tokyo to propel global stock prices higher. A giant Japanese pension fund also gave bulls reason to cheer when it said it plans to amp up its stock holdings.
The BoJ’s unexpected decision to fight deflation by mounting a more aggressive stimulus program, via bigger purchases of government bonds and purchases of stocks via exchange traded funds and real estate investment trusts, got most of the credit for today’s stock rally. A decision by Japan’s big pension fund to buy more stocks and less bonds amounted to what Citigroup calls a “double shock” of bullish news for global markets.
“The Bank of Japan and the Government Pension Investment Fund (GPIF) surprised markets,” Citigroup’s Asia Pacific investment strategist Ken Peng and Steven Wieting, the firm’s global chief investment strategist, told clients in a research note.
Indeed the double whammy of “additional significant monetary stimulus” — the BoJ increased its asset purchase targets by 64% — and a “major shift in asset allocation towards higher-risk assets” by GPIF sparked a big rally around the world and on Wall Street.
The reason: the BoJ’s additional stimulus is viewed as an economic positive, while the GPIF’s decision to up its stock holdings means there’s a new big buyer of stocks, which creates fresh demand for stocks. The GPIF manages 127 trillion yen, which equates to $1.13 trillion U.S. dollars.
Indeed, the big pension fund’s decision to double its target of stock holdings was also a boon for stock market sentiment.
The pension fund plans on doubling its holdings in both Japanese and foreign stocks, which would increase its total stock allocation to 50%, from 25%. A 50% stock allocation equates to roughly $565 billion U.S. dollars in buying power. See chart below for the new allocations, which include bigger helpings of stocks and smaller helpings of bonds. Pension funds like the GPIF, need bigger returns to meet their obligations.
