Japan is fortunate to have built up significant pension reserves in the previous decades – and indeed now has a major asset in the form of the Government Pension Investment Fund (GPIF) which represents the largest pension fund in the world at JPY140tn (USD 1.4tn) - a major tool for addressing the demographic and deficit challenges of the country. The fund represents nearly one quarter of the country‘s GDP and three and a half years of annual public pension expenditure.
How the GPIF is managed is therefore of key importance to the Japanese government and people –as well as for capital markets and companies both domestically in Japan and potentially overseas.
Yet the GPIF is at present being run as a low profile, low cost and seemingly low risk institution.
Though reforms of recent years established
the GPIF as an independent institution on paper, the
governance structure of the fund is sub-optimal and does not conform to OECD recommendations and international good practice, leaving the fund exposed to greater risks than may seem apparent on the surface. As importantly, the current structure and management represent a major wasted opportunity for the Japanese government and society at large.
This paper aims to look at whether the GPIF conforms with OECD guidance and international good practice, and makes recommendations for improving the governance and thereby reducing the risk of the fund, along with suggestions for unlocking the potential of this unique institution.