Japanese Pension Funds Hike Foreign Investment In July

In a report published Monday, Morgan Stanley strategist Taisuke Tanaka noted some unusual activity by Japanese pensions funds. According to Tanaka, funds in the country rapidly increased investment in foreign securities over the course of July. Acquisition of non-Japanese assets had been slowing from April to June before the spike. He saw two potential reasons for the development:

Tanaka speculated that the pension funds "may have taken advantage of the opportunity created by the sudden drop in the USD/JPY to the ¥120 level in the wake of the Greek and Chinese troubles." He believes that pension activity will continue to support the USD/JPY around the low-120s "going forward."

Tanaka also highlighted, however, the upcoming incorporation of three of Japan's largest mutual funds -- with a combined ¥33 trillion under management -- into the country's Government Pension Investment Fund in October. He posited that these firms could be moving aggressively to match their asset allotment with that of the GPIF before the merger. The strategist highlighted that in March, the three mutual funds had much less exposure to both domestic and foreign equities than did the government fund. Many experts at the time predicted that the private funds would try to "catch up" by September. But given the fact that foreign investment slowed from April to June, Tanaka said that it's unclear "whether the sudden burst in foreign securities purchasing by the pensions last month was simply buying on dips or preparation for the October merger." Tanaka projects that the USD/JPY, supported by pension activity, will rise steadily in anticipation of a Fed rate hike to somewhere within the ¥125-130 range. From there, he expects increased volatility.