Thursday, February 2, 2017

Japan's GPIF Making America Great Again?

Japan's Nikkei reports, Japan's pension megafund to invest in US infrastructure:
Infrastructure investments in the U.S. by Japan's Government Pension Investment Fund will feature heavily in the economic cooperation package to be discussed at next week's summit in Washington between the two countries' leaders.

The goal is to create hundreds of thousands of American jobs, in keeping with U.S. President Donald Trump's agenda, and deepen ties between the two countries.

New cabinet-level talks discussing trade policies and economic cooperation agreements are also on the table. Japan's contingent would likely include Finance Minister Taro Aso, Economic Minister Hiroshige Seko, and Foreign Minister Fumio Kishida. The U.S. is expected to send incoming Commerce Secretary Wilbur Ross and incoming U.S. Trade Representative Robert Lighthizer to that meeting. Japanese Prime Minister Shinzo Abe and Trump will aim for agreement on that framework during their Feb. 10 meeting.

"I wish to discuss [Japanese] contributions toward improved productivity and competitiveness in the entire U.S. industrial sector, or a large framework that includes aid for infrastructure development," Abe told members of the lower house Wednesday. His government has started to lay out a comprehensive initiative addressing job growth.

The draft proposal will feature infrastructure investments in the U.S. by Japan, joint robotics and artificial intelligence research by the two sides, and countermeasures against cyber attacks.

The GPIF will purchase debt issued by American corporations to finance infrastructure projects. Up to 5% of the roughly 130 trillion yen ($1.14 trillion) in assets controlled by the megafund can go toward overseas infrastructure projects. Currently, only tens of billions of yen are invested in that asset class, leaving room for expansion. Long-term financing for high-speed rail projects in Texas and California would be provided through such avenues as the Japan Bank for International Cooperation.

In the area of research and development, Japan aims for joint development of medical and nursing care robots. Robots will also help boost efficiency in inspections of America's aging infrastructure. Japan is considering joint research in decommissioning nuclear reactors.
I give credit to Zero Hedge for bringing this up to my attention, adding their own analysis as to why Japan's pension whale is investing in US infrastructure (underlined emphasis is mine):
Having decided to actively increase its risk exposure over the past few years, including venturing into high beta stocks and junk bonds - a gamble that has lead to a big jump in quarterly volatility not to mention significant downside risk should global markets suffer a crash - Japan's Government Pension Investment Fund, or GPIF, the world's largest pension fund, has decided to invest in US infrastructure projects next.
According to Japan's Nikkei, infrastructure investments in the U.S. by Japan's GPIF will feature heavily in the economic cooperation package to be discussed at next week's summit in Washington between the two countries' leaders. The stated goal is to create "hundreds of thousands of American jobs", in keeping with U.S. President Donald Trump's agenda, and deepen ties between the two countries. The unstated goal is to avoid Trump lashing out at Japan as a currency manipulator, and putting in peril Japan's QQE "with curve control" experiment, which is the bedrock of all Abenomics (as further expained in the following Nikkei piece).

Japan has grown nervous that after Mexico, China and Germany, it may be next nation to find itself in Trump's spotlight, something Trump hinted at yesterday during his meeting with pharma CEOs when he said that "other countries take advantage of America by devaluation," and then directly named China and Japan as "planning money markets," presumably implying manipulation.

As such, Japan's prime minister may be simply offering up billions in pension fund capital as a source of capital for the upcoming Trump infrastructure projects to placate the president and avoid a far more dire outcome, should Trump launch currency or trade war with Japan. Whatever the logic behind Abe's thinking, new cabinet-level talks discussing trade policies and economic cooperation agreements are also on the table.

Japan's contingent headed to the US would likely include Finance Minister Taro Aso, Economic Minister Hiroshige Seko, and Foreign Minister Fumio Kishida, the Nikkei reported. The U.S. is expected to send incoming Commerce Secretary Wilbur Ross and incoming U.S. Trade Representative Robert Lighthizer to that meeting. Japanese Prime Minister Shinzo Abe and Trump will aim for agreement on that framework during their Feb. 10 meeting.

"I wish to discuss [Japanese] contributions toward improved productivity and competitiveness in the entire U.S. industrial sector, or a large framework that includes aid for infrastructure development," Abe told members of the lower house Wednesday. His government has started to lay out a comprehensive initiative addressing job growth.

The draft proposal will feature infrastructure investments in the U.S. by Japan, joint robotics and artificial intelligence research by the two sides, and countermeasures against cyberattacks.

How will the Japanese megafund alllocate pension capital? According to the Nikkei, the GPIF will purchase debt - using the funds of retired Japanese citizens - issued by American corporations to finance infrastructure projects. Up to 5% of the roughly 130 trillion yen ($1.14 trillion) in assets controlled by the megafund can go toward overseas infrastructure projects. Currently, only tens of billions of yen are invested in that asset class, leaving room for expansion. Additionally, long-term financing for high-speed rail projects in Texas and California would be provided through such avenues as the Japan Bank for International Cooperation.

While we doubt Japanese pensioners are aware that the returns on public infrastrcuture are some of the lowest in the world, if not outright negative, we are confident they will learn soon enough, although since the full IRR will become evident only over a period of years, they may have bigger concerns should the Nikkei and/or global stock markets, where the GPIF is now heavily invested, crash first.
Fox News also reports, Japan's Abe to propose major job-creating plan to Trump, reports say:
Angling to pre-empt complaints over Japan's perennial trade surplus with the U.S., Prime Minister Shinzo Abe reportedly plans to propose a sweeping economic cooperation initiative meant to create hundreds of thousands of jobs in the U.S. when he meets with President Donald Trump later this month.

Abe and Trump are expected to meet on Feb. 10. Major Japanese newspapers cited a draft of the proposal that calls for cooperation on building high-speed trains in the U.S. northeast, Texas and California. Japan would share technology on artificial intelligence, robotics, small-scale nuclear power plants, space and Internet technology.

The reports Thursday said the proposed public-private initiative would create several hundred thousand jobs, reports said, and involve $450 billion in new investment.

The government pension fund may invest in the projects, the reports said.

Asked about the reported package, Chief Cabinet Secretary Yoshihide Suga told reporters Tuesday that nothing definitive has been decided for talks between the two leaders.

"We hope to have constructive talks in order to seek how we can forge a mutually win-win relationship," Suga said. He did not deny the report, but only added that any decision on involvement by the Government Pension Investment Fund would be based on whether it would benefit those covered by the fund.

Other officials did not immediately respond to questions on details of the proposed package.
Interesting how Suga threw in "any decision on involvement by the Government Pension Investment Fund would be based on whether it would benefit those covered by the fund." I strongly doubt that, Japan's GPIF isn't known for its world class governance and is heavily influenced by the government.

Just like other global pensions, the GPIF has ridden the Trump effect up nicely and it may feel it's time to give back some love, making America great again.

But the good times based on Trumptimism and Trumphoria are coming to end, and this begs the question, is this a smart move on the part of GPIF which has little to no experience in global infrastructure investments?

The answer is of course not but President Trump doesn't care about Japanese pensioners facing their pension storm, he sees Japan's pension whale as a giant cash cow which he will milk to fulfill his promise to revamp America's infrastructure. I'm certain he "made a deal" which Prime Minister Shinzo Abe couldn't refuse, if you catch my drift.

Go back to read my comment when Trump was elected, Will Pensions Make America Great Again?, where I stated the following:
One area which Trump is definitely committed to is spending on infrastructure. Jim Cramer of CNBC said this morning he sees the Treasury department emitting new 30-year bonds to cover the trillion dollar spending program Trump has outlined to revamp airports, roads, bridges and ports.

Here, I will refer the Trump administration to what the Canadian federal government is doing, setting up a new infrastructure bank, allowing Canada's large pensions and other large global investors, to invest in large greenfield infrastructure projects.

I discussed this new initiative and what Canada's large pensions are looking for in a recent comment where I also shared insights at the end in an update from Andrew Claerhout, Senior Vice-President of Infrastructure & Natural Resources at Ontario Teachers' Pension Plan.

Why am I mentioning this? Because if Trump's administration is really committed to "making America great again" and spending a trillion or more on infrastructure, they will need a plan, a blueprint and they definitely should talk to the leaders of Canada's large pensions, widely considered to be among the best infrastructure investors in the world.

There is another reason why I mention this. The US has a huge pension problem as many public sector pensions are chronically underfunded. There is a growing appetite for infrastructure assets around the world, including in the United States where large public pensions are looking to increase their allocations.

If a Trump administration sets up the right program on infrastructure, modeled after the Canadian one, and establishes the right governance, it will be able to attract capital from US public pensions starving for yield as well as that from Canadian and global pensions and sovereign wealth funds which would welcome such a program as it fits perfectly with their commitment to infrastructure as an asset class.

The big advantage of integrating US and global pensions as part of the solution to rebuilding America's infrastructure is that it will limit the amount the US needs to borrow and will make this ambitious infrastructure program more palatable to deficit hawks like Paul Ryan (who might not be the speaker of the House come January).

And if it's done right, it will allow many US public pensions to invest massively in domestic infrastructure, allowing them to collect stable cash flows over the long run, helping them meet their mounting future liabilities. The same goes for Canadian and global pensions which would also invest in big US infrastructure provided the governance is right.
Well, President Trump basically ignored Canadian and US pensions and went for the easy money, Japan's pension whale. Why? Because Trump knows Canadian and US public pensions have tight governance rules and governance runs anathema to his "art of the deal" approach (the man has zero patience, and infrastructure requires lots and lots of patience as it takes years to build these projects).

I may be too cynical on this deal but I really think both Trump's administration and Abe's administration didn't think things through, much like Trump's stupid executive order banning refugees.

Importantly, if you're going to really make America great again by revamping the nation's infrastructure, you need the world's best infrastructure investors to accomplish this and they happen to be here in Canada, not Japan.

Sure, the GPIF can write huge cheques but that's pretty much all it can do. It can't advise the new administration on how to best structure the deals, it can't offer its expert advice on how best to build and manage these infrastructure assets over the long run , it can't do a lot of things.

In fact, my worst fear is the GPIF will be asked to finance these infrastructure projects so Trump's buddies that own huge construction companies and others that work at big banks will make off like bandits. Again, where is the governance here? It's basically going to be a free-for-all on the backs of poor Japanese pensioners.

Like I said, I hope I'm wrong but this deal smacks of political blackmail and strong-arming and I'm highly skeptical it's in the best interests of Japanese pensioners or even US taxpayers for that matter (but Trump will spin it that way).

[Note: Sort of like the Carrier deal where Trump "saved" 1,000 manufacturing jobs so people can congratulate him and ignore the fact that he's going to cut taxes in a 'bigly" way, enriching American plutocrats like never before, a move that will only exacerbate inequality and fuel more deflation down the road.]

If Japan's GPIF is serious about investing in foreign infrastructure, I suggest it focuses on Canadian infrastructure projects where the governance and alignment of interests will be far better than in the US. Not only that, the loonie is weak, so they would be investing in long-term projects at a time when the exchange rate is very favorable.

Those are my thoughts on the GPIF making America great again. As always, if you have different views, feel free to contact me at LKolivakis@gmail.com and I'll be happy to share them, even anonymously.

Below, once again, Ontario Teachers' Pension Plan President and CEO Ron Mock discusses the challenges facing pension funds in the wake of Brexit and President-Elect Donald Trump's election, and the investment risks from geopolitics. He speaks with Erik Schatzker from the World Economic Forum in Davos, Switzerland on "Bloomberg Markets." Listen carefully to his comments on US infrastructure, it isn't as simple as the GPIF or others think, but they will learn the hard way.

Update: Japan's Government Pension Investment Fund on Thursday denied a newspaper report that it would invest in U.S. infrastructure bonds as part of an economic cooperation package to be discussed between the two countries' leaders next week.

In a statement on the fund's Twitter account, GPIF President Norihiro Takahashi said "there was no truth" to the report, adding that its investment decisions were made for the benefit of its policyholders. 

Also, Japanese Prime Minister Shinzo Abe on Friday said the government was not considering using the Government Pension Investment Fund for investing in infrastructure in the United States. 

Hmm, I guess this was "fake news"....very, very strange!!

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