Japanese corporate pension funds: risks growing for Asia's emerging markets

Relying on high-growth markets is not showing the results it once did - and the current situation is posing more questions than answers, says one corporate pension fund manager.
Japanese corporate pension funds: risks growing for Asia's emerging markets

Corporate pension funds in Japan are struggling to identify the best allocation strategies as the knock-on from distruptive events globally is being felt in Asia's emerging markets, according to leading pension funds.

With China’s economy challenged by lockdowns and general repercussions from the Covid-19 pandemic, as well as regulatory interventions that have shaken financial markets, Asia's other emerging economies are now also feeling the burn.

Despite this, many of Japan’s corporate pension funds say they intend to stay the course with emerging market equities, hoping for higher growth over the long-term, says Konosuke Kita, director of consulting at Russell Investments in Japan.

Konosuke Kita

“It looks risky, but on the other hand, the Chinese economy is supposed to continue to grow over time. The judgement on whether the pension funds should continue to invest in emerging [equity] is not easy. Some investors may quit, and others may continue for diversification from advanced economy,” Kita told AsianInvestor.       

He said that more than 75% of emerging equity investment is in Asian countries, and many of these are likely to be affected by China. The extent to which China's rebounds will have a huge influence on the value of the emerging market strategy of Japan's corporate pension funds.

As Kita pointed out, equity returns of emerging economes were currently lower than advanced economy during the 2010s.


One corporate pension fund that sees plenty of challenges to balance this emerging market uncertainty is Kewpie Pension Fund, the namesake corporate retirement fund for the food manufacturer best known for its mayonnaise.

Kosuke Okimori

Kosuke Okimori, its executive investment director, manages two funds with a current total of ¥69 billion ($511 million dollars) of assets under management.

He says markets are still showing more green lights than red flags.

“For us [Japanese corporate pension funds], it is very hard to find an attractive assets class at the moment. I am basically waiting for a new trend to follow,” Okimori told AsianInvestor.

For instance, he sees problems with overseas fixed income since the hedging costs for Japanese investors might increase, wiping off the coupon, or annual interest rate, in the near future.

At the same time, the strong dollar also means that private assets have gained so much share of the portfolio it has become overweighted. While Kewpie Pension Fund - among Japanese corporate pension funds - has benefitted from being an early mover into alternatives investments, Okimori says the impact from the recent depreciation of the Japanese yen is cause for concern.

"For the last 12 months private assets contributed positively for our return, but that may not be the case for the coming year. I have to be careful about new investments due to the unpredictable currency rate,” Okimori said.

See also: Japan pensions seen building exposure to illiquid assets


On top of the yen depreciation against the US dollar, Japanese investors are also seeing their developed markets equity portfolios take a dip as markets react to central bank interest rate hikes to counter inflation.

According to Russell Investments’ Kira, some corporate pension funds may decrease equity exposure in developed markets, but he expects the change in equity allocation to be marginal.

Apart from not wanting to add a timing risk to their equity strategy, he said that most have seen a surplus from equity investments and therefore could afford to maintain equity risk.

“Most corporate pension funds will not change allocation on equity and fixed income investments, and I think the trend of shifting to private markets will continue,” Kita said, elaborating that, if anything, they may start to reconsider their fixed income portfolios.

“In recent years corporate pension funds have shifted from benchmarks (such as the FTSE World Government Bond Index or Bloomberg Global Aggregate Index) to shorter duration assets or taken credit risks under the very low-yield environment. Once yields go up, they may move back to longer duration,” Kita said.

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