As Bonds Bottom, Big Japanese Bank Moves Aggressively into Hedge Funds, Real Estate

Japan Post Bank (JPB) will increase its investment allocation to alternative assets, including real estate, hedge funds, private equity, and private debt by about ¥7 trillion ($64 billion) in the next three years.

The move comes as a strategic decision to offset an expected yield decline in the Tokyo-based bank’s massive holdings in Japanese government bonds. the Japan 10-year yields 0.04% and the 30-year bond 0.72%.

Inflation year-on-year in April registered 0.6%.

Analysts note that Japan Post Bank, at one point the largest deposit-holding bank in the world, has been hit hard by perpetually low interest rates.

The Japanese government has been holding down rates for decades in a bid to stave of deflation, trying to shake the hangover from the go-g0 1980s property boom that once saw Japan conquering the world and buying up iconic American companies and real estate.

The cost has been in the form of ultralow lending rates, which means big, conservative banks are forced to search for yield in other places. That can mean the formation of new bubbles in stock and property markets, but the leadership in Tokyo has kept interest rates low just the same.

The three year management plan, which will run through March 31, 2021, targets alternatives investments of ¥8.5 trillion during this period, which is a more than five-fold increase from ¥1.6 trillion as of the March 31, 2018.

Over the same period, JPB will reduce its allocation to bonds and other interest bearing assets from 61 percent to 55 percent.

Although JPB has not announced the exact figures for its targeted investments in each alternatives category, but a bar chart featured in its management plan reveals investments of about ¥3 trillion in real estate, ¥2.2 trillion in PE, ¥2 trillion in hedge funds, and ¥1.3 trillion in private debt.

In the management plan, the bank says that it will fully utilize capital to invest in risk assets such as alternative investments in order to secure stronger earnings.

The bank will also promote sophistication and diversification of investment management in response to the decline in its interest income from government bonds.

The bank also plans to see acquisition opportunities in private equity through Japan Post Investment Corp, which is its JV with Japan Post Insurance, to enhance its earnings further.

Alternative income

Katsunori Sago, former Goldman Sachs executive, who has build JPB’s investment team in recent years, had said a year ago that allocating about 3% of the bank’s portfolio to alternatives would suffice.

But the current figures show that the bank would have about 4% of its portfolio allocated to alternative investments.

The management plan shows that JPB expects its alternatives allocations to deliver 11% of the bank’s interest income. (At present the income from alternatives for the bank stands at less than 1%.)

Government bonds and other instruments are expected to deliver a little over 25% of net interest income, which is a decline from 36% for the latest financial year.

For the fiscal year ended March 31, 2018, JPB reported a net profit of ¥ 352.77 billion, up from ¥ 312.26 billion in the previous year.