The New Investment Management Scheme for Japan's Public Pension Fund

Masaharu Usuki 

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Japan's public pension system, which operates under a pay-as-you-go financing method, has some 140 trillion yen in reserve assets. These assets had been primarily managed by the Fiscal Investment and Loan Program and invested in public agencies. However, from April 2001, the fund has come to be invested in marketable securities under the management of the Minister of Health, Labor and Welfare and the Government Pension Investment Fund (GPIF).

The fund's collective investment scheme has its merits, especially in alleviating the disadvantages that individual investors face in Japan's securities markets. Also, laws have stipulated several arrangements to optimize the risk-return profile of portfolios as well as to prevent political intervention. They include: (a) the Minister of Health, Labor and Welfare's obligation to consult with a committee of experts, (b) establishment of an independent management organization, and (c) assessment of fiduciary responsibilities on those engaged in the investment process.

However, there is room for improvement in attaining more efficient management and securing political neutrality. One of the measures I would recommend is the complete separation of the investment management process from the political process regarding decisions on the level of reserve and allocation between non-marketable and marketable securities. GPIF-the investment management organization-should have an independent board. In addition, executives and management staff should have a background and experience in investment management, and be given proper monetary and non-monetary incentives.

Masaharu Usuki

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