## 3. Potential Portfolio Outflows by Japanese Institutional Investors, 2015–17

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---

### Introduction and policy context
- Japan faces four closely related economic problems: ending deflation, raising growth, securing fiscal sustainability, and maintaining financial stability.
- Abenomics (early 2013) implemented three coordinated policy “arrows”: aggressive monetary easing, flexible fiscal policies, and structural reforms.
- The Bank of Japan (BoJ) adopted the quantitative and qualitative monetary easing (QQE) framework in April 2013, with a higher inflation target and stronger coordination with fiscal and structural policies.
- The BoJ’s QQE operational target was to double the monetary base by end-2014 to around 54 percent of GDP.

### QQE expansion (October 31, 2014) and transmission considerations
- BoJ decisions on October 31, 2014:
  - Accelerate JGB purchases to an annual pace of ¥80 trillion (from ¥50 trillion before).
  - Extend the average remaining maturity of JGB purchases to around 7–10 years (from 7 years before).
  - Triple its purchases of EFTs and J-REITs.
- BoJ commitment and projection:
  - Maintain QQE “for ‘as long as it is necessary’ to maintain its 2 percent inflation target in ‘a stable manner.’”
  - Expects to reach the 2 percent target “around the first half of fiscal 2016” (i.e. April to September of 2016).
- Transmission channels (Kuroda, 2013):
  - Interest rate channel: purchases of long-dated government securities and risk assets lower the term premium and risk premiums, supporting business investment, durable goods consumption and residential investment.
  - Portfolio rebalancing channel: large BoJ purchases of JGBs—exceeding their net issuance—induce investors and financial institutions to shift from JGBs to higher-yielding assets such as foreign bonds, stocks and loans.
  - Expectations channel: rising inflation expectations via BoJ communication and forward guidance lower long-term real interest rates, stimulate near-term activity, and push up the Philips curve (noting Japan’s relatively flat Philips curve).
- Empirical note: a BoJ study finds the 10-year JGB term premium compressed by about 80 basis points under QQE from March 2013 to December 2014 (Sato, 2015).

### Transmission, persistence, and potential limits to QQE
- Maintenance rationale:
  - Given that trend inflation is only slowly rising and real-economy effects have been modest, quantitative easing is likely to be maintained for an extended period of time.
- Scale and potential limits:
  - Current unprecedented pace of JGB purchases is equivalent to about 1 percent of GDP every month, or near 10 percent of the market on an annual basis.
  - Potential limits highlighted:
    - Risks to central bank balance sheets upon exit.
    - Financial stability risks from an extended period of monetary easing.
    - Risk that monetary easing leads to complacency on fiscal and structural reforms.
    - Concerns about debt monetization.
  - Focus of analysis: quantitative limits to portfolio rebalancing among financial institutions and implications for monetary easing.

### Role of JGBs as safe assets and market implications
- In Japan, with limited securitization, safe assets mainly comprise JGBs.
- Large BoJ JGB purchases can create a supply-demand imbalance that may limit the BoJ’s ability to achieve monetary base targets.
- Market signs consistent with limits:
  - Exceptionally low (and sometimes negative) yields on JGBs.
  - A large negative term premium.
  - Signs of reduced JGB market liquidity.
- If markets anticipate limits, the rise in inflation expectations could be contained, mitigating incentives for portfolio rebalancing and potentially creating a self-fulfilling cycle that undermines BoJ objectives.

### Evidence of portfolio rebalancing under QQE1 (March 2013–September/December 2014)
- Interest rate and market outcomes:
  - JGB yields have declined and remained relatively stable despite volatile bond market movements in other advanced economies.
  - The term premium implied in 10-year JGB yields remains compressed based on historical norms and compared to other advanced economies.
- Bank behavior and holdings:
  - Japanese banks sold about ¥30 trillion of JGBs between March 2013 and September 2014, covering almost all BoJ net JGB purchases above net issuance during the same period.
  - Domestic bank lending rose by 2 percent for major banks and 4 percent for regional banks by end-2014.
  - Japanese banks expanded overseas loan portfolios to exceed $500 billion for the first time in more than 15 years.
  - About 60 percent of external loans are financed through external deposits; the rest via foreign-currency-denominated bonds and short-term instruments such as foreign exchange swaps.
  - Banks are accumulating significant excess reserves; bank lending has picked up only gradually.
- Insurance companies and pension funds:
  - Insurance companies maintained a strong appetite for JGBs during QQE1; outward portfolio investment by insurance companies was limited.
  - Public and private pension funds increased outward portfolio investment, spurred by shifts in GPIF allocation targets.
  - GPIF (with more than $1 trillion in assets under management) changed the portfolio weight of foreign securities from 17 percent to 23 percent in late 2013.
- Expectations and real-economy transmission:
  - Measures of inflation expectations rose until mid-2014 but have recently fallen and converged to about 1 percent, remaining well below the BoJ’s 2 percent target.
  - Transmission to the real economy and inflation has been weaker than expected because:
    - Exports did not respond strongly to the weaker yen due to production offshoring, supply-chain dynamics, and subdued global growth.
    - Credit demand remained tepid despite record low real lending rates and corporate bond yields.
    - Large manufacturing firms held ample cash; household borrowing remained broadly flat.
    - Stock prices more than doubled since QQE launch, but household equity holdings are relatively small so wealth effects are limited.

### Potential portfolio rebalancing scenario under QQE2 (assumptions and dynamics)
- BoJ market share trajectory and comparisons:
  - At end-2014 the BoJ held about a quarter of the JGB market.
  - At the current pace, the BoJ will hold about 40 percent of the market by end-2016 and close to 60 percent by end-2018.
  - The Bank of England held close to 40 percent of the conventional gilt market at one point without causing significant market impairment.
- Reasons QQE2 may accelerate/deepen portfolio rebalancing:
  - Domestic bank JGB holdings have already declined considerably; private banks are starting to taper JGB sales due to collateral needs (major banks) and lack of alternative domestic bonds for interest income (regional banks). Most recent JGB sales by banks have come from Japan Post Bank.
  - Maturity extension of JGB purchases under QQE2 should lead to more JGB sales by insurance companies and pension funds that predominantly hold long-term JGBs; unlike banks, these investors cannot hold excess reserves at the central bank, so they should provide fresh liquidity to real estate, corporate bonds, and equities.
  - Recent pension fund reforms are leading the GPIF and other pension funds to reallocate from JGBs into higher-yielding securities.
  - Empirical shift: under QQE1, around 5 percent of BoJ net JGB purchases from the market came from institutional investors; under QQE2, close to 40 percent of net purchases came from institutional investors between October 2014 and March 2015.
- Rebalancing scenario assumptions for domestic holders (who collectively own more than 80 percent of the JGB market excluding the BoJ):
  - Banks continue to reduce JGB holdings until they reach 5 percent of total assets—a considered minimum to satisfy collateral needs given the size of repo and derivative markets in Japan; this is on the lower end of sovereign bond holdings by banks in other G7 economies and the historical minimum since the 1980s.
  - Pension funds continue to be net sellers of JGBs, led by GPIF. The GPIF’s new portfolio benchmarks align with targets used in other countries and aim to prepare for higher inflation and provide more risk capital to the economy.
- Minimum demand and sustainability concerns:
  - A “minimum” level of demand for JGBs is likely to persist from banks, pension funds, and insurance companies due to collateral needs, asset allocation targets, and ALM requirements.
  - The sustainability of the BoJ's current pace of JGB purchases may become an issue as these minimum demands and structural shifts constrain available domestic supply for purchases.

### QQE scale, projected limits, and timing
- Under QQE, the BoJ is currently buying nearly 10 percent of the government bond market on an annual basis.
- Under QQE2, the BoJ will hold more than 60 percent of the JGB market by end-2019.
- Estimated investor shedding under baseline assumptions:
  - Japanese investors could shed some ¥220 trillion of JGBs until end-2018 under baseline assumptions.
  - Japanese insurance companies and pension funds could reduce their government bond holdings by ¥44 trillion by end-2018.
  - Banks could sell another ¥176 trillion by end-2018, which would bring their JGB holdings down to 5 percent of total assets in the baseline.
- Alternative bank-behavior scenario:
  - If banks reduce JGB holdings only to 10 percent of assets, the BoJ may have to taper purchases earlier, reaching speed limits by end-2016.
- Conclusion on timing:
  - Under plausible assumptions, limits will be reached sometime in 2017 or 2018 under current policies.
- Exit risks:
  - Approaching limits could move the market from excess demand to excess supply if (i) the central bank balance sheet is reduced in size; and (ii) the fiscal deficit remains high, potentially triggering abrupt jumps in yields and term premiums.

### Institutional investor rebalancing and projected capital outflows (2015–17)
- Insurance companies and pension funds could invest as much as ¥44 trillion ($350 billion), or 8 percent of GDP, in foreign assets (2015–17) under the baseline rebalancing scenario.
- Scenario projections for portfolio outflows by Japanese institutional investors, 2015–17 (Billions of U.S. dollars):
  - Baseline: Total 350; Insurance Companies 100; Private Pensions 255; Public Pensions 225.
  - Complete policies: Total 559; Insurance Companies 275; Private Pensions 80; Public Pensions 225.
  - Incomplete policies: Total 225; Insurance Companies 0; Private Pensions 80; Public Pensions 225.
- Under the baseline, if insurance companies and private pension funds maintain current international allocation ratios:
  - 80 percent of outflows would go into bonds of other advanced economies.
  - 14 percent into emerging market bonds.
  - 6 percent into global equities.
- GPIF announced new target allocations in October 2014:
  - 35 percent (± 10 percent) for domestic bonds.
  - 25 percent (± 9 percent) for domestic stocks.
  - 15 percent (± 4 percent) for international bonds.
  - 25 percent (± 8 percent) for international equities.
- GPIF asset shares as of March 2015:
  - 39 percent in domestic bonds.
  - 22 percent in domestic stocks.
  - 13 percent in international bonds.
  - 21 percent in international equities.
  - 5 percent invested in short-term assets.
- Additional public pension funds:
  - Seven other public pension funds manage about ¥50 trillion ($400 billion) of assets as of end-March 2015; three of these with combined assets of ¥30 trillion announced they will model GPIF’s new allocation starting October 2015.

### Insurance companies, solvency rules, and asset shifts
- In 2014, insurance companies reduced their JGB holdings for the first time in more than a decade, while accelerating foreign security purchases.
- Regulatory changes after 2012 that may have encouraged foreign security holdings:
  - Solvency requirements revised: capital charge for foreign bonds reduced from 2 to 1 percent.
  - Investment limit on foreign security holdings removed.
- Projection: insurance companies are projected to gradually raise their foreign holdings from 15 to 25 percent of assets, consistent with international practices and ALM constraints.

### Market liquidity indicators and signs of stress to monitor
- Trading volumes:
  - Trading volumes have fallen by about 20 percent for 10-year JGBs since the launch of QQE; volumes remain broadly unchanged or slightly higher for medium-term and super-long JGBs.
- Bid-ask spreads:
  - Bid-ask spreads for newly issued 10-year JGBs have remained tight but exhibit more short-term volatility after launch of QQE2.
- Fails and Securities Lending Facility:
  - Number and face value of fails have increased somewhat but remained well below peak 2008 levels.
  - Amount of JGBs lent by the BoJ through the Securities Lending Facility has remained below ¥15 trillion per month, although demand rose since launch of QQE2 and after March 2015 expansion.
  - In March 2015 authorities raised the upper limit of sales per issue from ¥200 to ¥400 billion, and extended consecutive sales days per issue from 5 to 15 business days.
- JGB futures liquidity:
  - Volume and tightness in the JGB futures market remained broadly unchanged; market depth and resiliency declined slightly over the course of QQE.

### Quantified projections, assets, and balance-sheet items (selected exact figures)
- Net market values of OTC derivatives, after bilateral netting agreements, increased by 21 percent to about US$ 200 billion, or to ¥25 trillion (period: end-2010 to end-2014).
- Under baseline rebalancing scenario, estimated JGB holdings changes (in trillions of yen):
  - BOJ's JGB Holdings: change from end-2014 to end-2018 = 207 → 527 (change 320).
  - Other Financial Institutions' JGB Holdings: 564 → 344 (change -220).
  - Pension Funds (public and private): 92 → 81 (change -11).
  - Insurance Companies: 199 → 166 (change -33).
  - Banks: 274 → 98 (change -176).
    - Domestically-licensed Banks: 106 → 55 (change -51).
    - Japan Post Bank: 110 → 10 (change -100).
  - Memo: Outstanding Stock of JGBs: 883 → 983 (change 100).
- Aggregate estimated investor shedding by end-2018: ¥220 trillion.

### Options and policy recommendations for the BoJ and authorities
- BoJ options if limits to JGB purchases are reached:
  - Shift composition of purchases more towards longer-dated securities (maturities of more than 10 years), akin to an Operation Twist.
  - Expand the Securities Lending Facility to alleviate collateral constraints and allow banks to hold fewer JGBs while meeting collateral needs.
  - Expand purchases of private assets by jumpstarting securitization markets (RMBS, CMBS, ABS) to create private assets for BoJ purchases.
- Other policy actions to stimulate bank lending and increase QQE effectiveness:
  - Enhance risk capital provision, encourage more asset-based lending, and remove barriers to entry and exit for small and medium-sized enterprises.
  - Lower the interest rate on excess reserves to further lower government bond yields and increase incentives for bank lending, noting trade-offs: this may hinder portfolio rebalancing by banks, particularly regional banks.

*Source: _wp15186 - 3. Potential Portfolio Outflows by Japanese Institutional Investors, 2015–17*

### 3. Potential Portfolio Outflows by Japanese Institutional Investors, 2015–17 ........................16

### 3. Potential Portfolio Outflows by Japanese Institutional Investors, 2015–17

### Introduction and policy context
- Japan faces four closely related economic problems: ending deflation, raising growth, securing fiscal sustainability, and maintaining financial stability.
- Abenomics (early 2013) implemented three coordinated policy “arrows”: aggressive monetary easing, flexible fiscal policies, and structural reforms.
- The Bank of Japan (BoJ) adopted the quantitative and qualitative monetary easing (QQE) framework in April 2013, with a higher inflation target and stronger coordination with fiscal and structural policies.
- The BoJ’s QQE operational target was to double the monetary base by end-2014 to around 54 percent of GDP.

### QQE expansion on October 31, 2014
- BoJ decisions:
  - Accelerate JGB purchases to an annual pace of ¥80 trillion (from ¥50 trillion before).
  - Extend the average remaining maturity of JGB purchases to around 7–10 years (from 7 years before).
  - Triple its purchases of EFTs and J-REITs.
- Objective: Maintain momentum in raising inflation expectations.
- BoJ commitment: Maintain QQE “for ‘as long as it is necessary’ to maintain its 2 percent inflation target in ‘a stable manner.’”
- BoJ projection: Expects to reach the 2 percent target “around the first half of fiscal 2016” (i.e. April to September of 2016).

### Transmission, persistence, and potential limits to QQE
- Given that trend inflation is only slowly rising and real-economy effects have been modest, quantitative easing is likely to be maintained for an extended period of time.
- The current unprecedented pace of JGB purchases is equivalent to about 1 percent of GDP every month, or near 10 percent of the market on an annual basis.
- Potential limits to QE highlighted:
  - Risks to central bank balance sheets upon exit.
  - Financial stability risks from an extended period of monetary easing.
  - Risk that monetary easing leads to complacency on fiscal and structural reforms.
  - Concerns about debt monetization.
- This paper focuses on quantitative limits to portfolio rebalancing among financial institutions and implications for monetary easing.

### Role of JGBs as safe assets and market implications
- In Japan, with limited securitization, safe assets mainly comprise JGBs.
- Large BoJ JGB purchases can create a supply-demand imbalance that may limit the BoJ’s ability to achieve monetary base targets.
- Market signs consistent with limits:
  - Exceptionally low (and sometimes negative) yields on JGBs.
  - A large negative term premium.
  - Signs of reduced JGB market liquidity.
- If markets anticipate limits, the rise in inflation expectations could be contained, mitigating incentives for portfolio rebalancing and potentially creating a self-fulfilling cycle that undermines BoJ objectives.

### BoJ policy options if limits bind
- Extend the maturity of purchases to longer-dated bonds (analogous to the U.S. Federal Reserve’s Operation Twist in 2011).
- Change the composition of purchases:
  - Extend purchases to local government debt.
  - Buy more private debt securities.
- Caveat: Local government and private debt markets are relatively small in Japan.

### Structure of the remainder of the analysis (sections II–IV)
- Section II: Stocktake of the monetary easing transmission mechanism in Japan.
- Section III: Evidence on portfolio rebalancing under the first wave of quantitative easing; comparisons with the U.K., the U.S., and the euro area; discussion of effects on inflation and the real economy.
- Section IV: Discussion of the enhanced monetary easing launched in October 2014 and derivation of potential limits to BoJ purchases consistent with financial institutions’ likely demand for JGBs.

*Source: _wp15186 - 3. Potential Portfolio Outflows by Japanese Institutional Investors, 2015–17*

### Section V discusses implications for capital outflows and potential JGB market signals that

### _wp15186 - Section V discusses implications for capital outflows and potential JGB market signals that

### QQE transmission mechanism in Japan
- QQE is intended to work through three interconnected channels (Kuroda, 2013):
  - Interest rate channel: purchases of long-dated government securities and risk assets lower the term premium and risk premiums, supporting business investment, durable goods consumption and residential investment.
  - Portfolio rebalancing channel: large BoJ purchases of JGBs—exceeding their net issuance—induce investors and financial institutions to shift from JGBs to higher-yielding assets such as foreign bonds, stocks and loans.
  - Expectations channel: rising inflation expectations via BoJ communication and forward guidance lower long-term real interest rates, stimulate near-term activity, and push up the Philips curve (noting Japan’s relatively flat Philips curve).
- Empirical note: a BoJ study finds the 10-year JGB term premium compressed by about 80 basis points under QQE from March 2013 to December 2014 (Sato, 2015).
- Transmission to the real economy operates via asset prices, the exchange rate, and bank lending—wealth effects and a lower cost of borrowing could raise growth and inflation; lower bond yields reduce the threshold for risk-returns of new loans.

### Evidence of portfolio rebalancing under QQE1
- Interest rate channel outcomes:
  - JGB yields have declined and remained relatively stable despite volatile bond market movements in other advanced economies.
  - The term premium implied in 10-year JGB yields remains compressed based on historical norms and compared to other advanced economies.
- Bank behavior and holdings:
  - Japanese banks sold about ¥30 trillion of JGBs between March 2013 and September 2014, covering almost all BoJ net JGB purchases above net issuance during the same period.
  - The decline in government debt holdings by major banks weakened sovereign-bank linkages.
  - Japanese banks are accumulating significant excess reserves; bank lending has picked up only gradually.
  - Domestic bank lending rose by 2 percent for major banks and 4 percent for regional banks by end-2014.
  - Japanese banks expanded overseas loan portfolios to exceed $500 billion for the first time in more than 15 years.
  - About 60 percent of external loans are financed through external deposits; the rest via foreign-currency-denominated bonds and short-term instruments such as foreign exchange swaps.
- Insurance companies and pension funds:
  - Insurance companies maintained a strong appetite for JGBs during QQE1; outward portfolio investment by insurance companies was limited.
  - Public and private pension funds increased outward portfolio investment, spurred by shifts in GPIF allocation targets.
  - GPIF (with more than $1 trillion in assets under management) changed the portfolio weight of foreign securities from 17 percent to 23 percent in late 2013.
- Expectations channel outcomes:
  - Measures of inflation expectations rose until mid-2014 but have recently fallen and converged to about 1 percent, remaining well below the BoJ’s 2 percent target.
  - Market-based measures can be distorted by limited liquidity; survey-based measures have shown upward bias and wide dispersion.
  - Inflation expectations display substantial persistence and appear to lag rather than lead actual inflation.
- Transmission to real economy and inflation has been weaker than expected for reasons including:
  - Exports did not respond strongly to the weaker yen due to production offshoring, supply-chain dynamics, and subdued global growth.
  - Credit demand remained tepid despite record low real lending rates and corporate bond yields.
  - Large manufacturing firms held ample cash; household borrowing remained broadly flat.
  - Stock prices more than doubled since QQE launch, but household equity holdings are relatively small so wealth effects are limited.

### Potential portfolio rebalancing scenario under QQE2
- BoJ market share trajectory and comparisons:
  - At end-2014 the BoJ held about a quarter of the JGB market.
  - At the current pace, the BoJ will hold about 40 percent of the market by end-2016 and close to 60 percent by end-2018.
  - The Bank of England held close to 40 percent of the conventional gilt market at one point without causing significant market impairment.
- Reasons QQE2 may accelerate/deepen portfolio rebalancing:
  - Domestic bank JGB holdings have already declined considerably; private banks are starting to taper JGB sales due to collateral needs (major banks) and lack of alternative domestic bonds for interest income (regional banks). Most recent JGB sales by banks have come from Japan Post Bank.
  - Maturity extension of JGB purchases under QQE2 should lead to more JGB sales by insurance companies and pension funds that predominantly hold long-term JGBs; unlike banks, these investors cannot hold excess reserves at the central bank, so they should provide fresh liquidity to real estate, corporate bonds, and equities.
  - Recent pension fund reforms are leading the GPIF and other pension funds to reallocate from JGBs into higher-yielding securities.
  - Empirical shift: under QQE1, around 5 percent of BoJ net JGB purchases from the market came from institutional investors; under QQE2, close to 40 percent of net purchases came from institutional investors between October 2014 and March 2015.
- Rebalancing scenario assumptions for domestic holders (who collectively own more than 80 percent of the JGB market excluding the BoJ):
  - Banks continue to reduce JGB holdings until they reach 5 percent of total assets—a considered minimum to satisfy collateral needs given the size of repo and derivative markets in Japan; this is on the lower end of sovereign bond holdings by banks in other G7 economies and the historical minimum since the 1980s.
  - Pension funds continue to be net sellers of JGBs, led by GPIF. The GPIF’s new portfolio benchmarks align with targets used in other countries and aim to prepare for higher inflation and provide more risk capital to the economy.
- Minimum demand and sustainability concerns:
  - A “minimum” level of demand for JGBs is likely to persist from banks, pension funds, and insurance companies due to collateral needs, asset allocation targets, and ALM requirements.
  - The sustainability of the BoJ's current pace of JGB purchases may become an issue as these minimum demands and structural shifts constrain available domestic supply for purchases.

*Source: _wp15186 - Section V discusses implications for capital outflows and potential JGB market signals that (IMF PDF content).*

### 2014. Similarly, from end-2010 to end-2014, the net market values of OTC derivatives, after taking account of

### _wp15186 - 2014. Similarly, from end-2010 to end-2014, the net market values of OTC derivatives, after taking account of

### QQE scale, projected limits, and JGB market implications
- Under QQE, the BoJ is currently buying nearly 10 percent of the government bond market on an annual basis.
- Under QQE2, the BoJ will hold more than 60 percent of the JGB market by end-2019.
- We estimate that Japanese investors could shed some ¥220 trillion of JGBs until end-2018 under baseline assumptions.
  - Japanese insurance companies and pension funds could reduce their government bond holdings by ¥44 trillion by end-2018.
  - Banks could sell another ¥176 trillion by end-2018, which would bring their JGB holdings down to 5 percent of total assets in the baseline.
- Alternative bank-behavior scenario: if banks reduce JGB holdings only to 10 percent of assets, the BoJ may have to taper purchases earlier, reaching speed limits by end-2016.
- Conclusion on timing: under plausible assumptions, limits will be reached sometime in 2017 or 2018 under current policies.
- Exit risks: approaching limits could move the market from excess demand to excess supply if (i) the central bank balance sheet is reduced in size; and (ii) the fiscal deficit remains high, potentially triggering abrupt jumps in yields and term premiums.

### Institutional investor rebalancing and projected capital outflows
- Insurance companies and pension funds could invest as much as ¥44 trillion ($350 billion), or 8 percent of GDP, in foreign assets (2015–17) under the baseline rebalancing scenario.
- Scenario projections for portfolio outflows by Japanese institutional investors, 2015–17 (Billions of U.S. dollars):
  - Baseline: Total 350; Insurance Companies 100; Private Pensions 255; Public Pensions 225.
  - Complete policies: Total 559; Insurance Companies 275; Private Pensions 80; Public Pensions 225.
  - Incomplete policies: Total 225; Insurance Companies 0; Private Pensions 80; Public Pensions 225.
- Under the baseline, if insurance companies and private pension funds maintain current international allocation ratios:
  - 80 percent of outflows would go into bonds of other advanced economies.
  - 14 percent into emerging market bonds.
  - 6 percent into global equities.
- Public pension funds (GPIF) announced new target allocations in October 2014:
  - 35 percent (± 10 percent) for domestic bonds.
  - 25 percent (± 9 percent) for domestic stocks.
  - 15 percent (± 4 percent) for international bonds.
  - 25 percent (± 8 percent) for international equities.
- GPIF asset shares as of March 2015:
  - 39 percent in domestic bonds.
  - 22 percent in domestic stocks.
  - 13 percent in international bonds.
  - 21 percent in international equities.
  - 5 percent invested in short-term assets.
- Additional public pension funds: seven other public pension funds manage about ¥50 trillion ($400 billion) of assets as of end-March 2015; three of these with combined assets of ¥30 trillion announced they will model GPIF’s new allocation starting October 2015.

### Insurance companies, solvency rules, and asset shifts
- In 2014, insurance companies reduced their JGB holdings for the first time in more than a decade, while accelerating foreign security purchases.
- Regulatory changes after 2012 that may have encouraged foreign security holdings:
  - Solvency requirements revised: capital charge for foreign bonds reduced from 2 to 1 percent.
  - Investment limit on foreign security holdings removed.
- Projection: insurance companies are projected to gradually raise their foreign holdings from 15 to 25 percent of assets, consistent with international practices and ALM constraints.

### Market liquidity indicators and signs of stress to monitor
- Trading volumes:
  - Trading volumes have fallen by about 20 percent for 10-year JGBs since the launch of QQE; volumes remain broadly unchanged or slightly higher for medium-term and super-long JGBs.
- Bid-ask spreads:
  - Bid-ask spreads for newly issued 10-year JGBs have remained tight but exhibit more short-term volatility after launch of QQE2.
- Fails and Securities Lending Facility:
  - Number and face value of fails have increased somewhat but remained well below peak 2008 levels.
  - Amount of JGBs lent by the BoJ through the Securities Lending Facility has remained below ¥15 trillion per month, although demand rose since launch of QQE2 and after March 2015 expansion.
  - In March 2015 authorities raised the upper limit of sales per issue from ¥200 to ¥400 billion, and extended consecutive sales days per issue from 5 to 15 business days.
- JGB futures liquidity:
  - Volume and tightness in the JGB futures market remained broadly unchanged; market depth and resiliency declined slightly over the course of QQE.

### Quantified projections, assets, and balance-sheet items (selected exact figures)
- Net market values of OTC derivatives, after bilateral netting agreements, increased by 21 percent to about US$ 200 billion, or to ¥25 trillion (period: end-2010 to end-2014).
- Under baseline rebalancing scenario, estimated JGB holdings changes (in trillions of yen):
  - BOJ's JGB Holdings: change from end-2014 to end-2018 = 207 → 527 (change 320).
  - Other Financial Institutions' JGB Holdings: 564 → 344 (change -220).
  - Pension Funds (public and private): 92 → 81 (change -11).
  - Insurance Companies: 199 → 166 (change -33).
  - Banks: 274 → 98 (change -176).
    - Domestically-licensed Banks: 106 → 55 (change -51).
    - Japan Post Bank: 110 → 10 (change -100).
  - Memo: Outstanding Stock of JGBs: 883 → 983 (change 100).
- Amount of potential portfolio rebalancing under QQE2, 2014–18 (potential sellers, In trillion yen): Bank of Japan, Pension funds, Insurance companies, Domestic banks (including Japan Post Bank) illustrated with red arrows indicating change from end-2014 to end-2018; aggregate estimated investor shedding of ¥220 trillion by end-2018.
- Japan could see insurance companies and pension funds invest as much as $350 billion (¥44 trillion) abroad in 2015–17 under baseline; up to $550 billion under complete policies; limited to $225 billion under incomplete policies.

### Options and policy recommendations for the BoJ and authorities
- BoJ options to provide continued monetary easing if limits to JGB purchases are reached:
  - Shift composition of purchases more towards longer-dated securities (maturities of more than 10 years), akin to an Operation Twist.
  - Expand the Securities Lending Facility to alleviate collateral constraints and allow banks to hold fewer JGBs while meeting collateral needs.
  - Expand purchases of private assets by jumpstarting securitization markets (RMBS, CMBS, ABS) to create private assets for BoJ purchases.
- Other policy actions to stimulate bank lending and make QQE more effective:
  - Enhance risk capital provision, encourage more asset-based lending, and remove barriers to entry and exit for small and medium-sized enterprises.
  - Lower the interest rate on excess reserves to further lower government bond yields and increase incentives for bank lending, noting trade-offs: this may hinder portfolio rebalancing by banks, particularly regional banks.

*Source: IMF staff analysis and projections as presented in the supplied content.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2015/_wp15186.pdf_