"Since we make investments with a long-term perspective such as 10 to 20 years, we don't have to realize temporary book losses (in European bonds) as long as we expect the market to eventually return to normal over time," Takahiro Mitani, president of the Government Pension Investment Fund, told Dow Jones Newswires in a recent interview.
"It's doubtful if it's good to take any hasty action when the markets are this rough, unless there's an urgent risk" of defaults in the entire region, he added.
The fund's stance runs counter to the recent trend among Japanese institutional investors of selling off euro-zone bonds, and offers at least some support to troubled European bond markets.
After last week's European summit did little to resolve the debt crisis, Mitani said it would take long time for the problem to be resolved.
He also said it would be "theoretically impossible" for weaker countries to leave the euro zone. "If Greece, for example, decides to leave the euro and return to the old drachma, people would rush to withdraw euro-denominated savings before they are converted to the local currency, as having cash in euro would be more profitable than the drachma, whose value would likely depreciate," he said.
Japan's nine major life insurance firms have already cut their exposure to debt issued by the seriously trouble countries of Portugal, Italy, Ireland, Greece and Spain to a combined total of Y550.9 billion from Y876.3 billion as of the end of September.
Some 8.37% of GPIF's assets were invested in foreign bonds at the end of September. The pension fund uses Citigroup World Government Bond Index, in which about 27% is made up of euro-denominated bonds, as its model for overseas bond investments.
As the pension fund faces a wave of payout obligations over the next few years, it has planned to begin investing in emerging-market equities by the end of the current financial year in March 2012 to seek higher returns.
Mitani said the fund is "steadily" getting ready for the plan, although the launch may be later than initially planned due to some delays in the preparation processes.
The pension fund--usually considered to be a conservative investor--had 68.28% of its assets in low-yielding domestic bonds.
Mitani expects Japan, despite having the worst fiscal conditions among advanced nations, to avoid a Europe-type debt crisis at least for another couple of years, as Japanese banks have no other places to park the huge amount of individual savings, as well as increasing corporate surplus cash.
"The current low interest rate environment is likely to continue for at least another two to three years for sure," he said, with Japan's 10-year yield expected to stay below a 1.5% during the period.
The benchmark 10-year yield was at 0.990%, as of 0208 GMT Wednesday. For the latest updates on the stock market, visit Stock Market Today For the latest updates PRESS CTR + D or visit Stock Market news Today
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