Government Pension Investment Fund Periodic Review of Policy Asset Mix Summary of Periodic Review ◯ The GPIF conducted a periodic review of the current Policy Asset Mix (PAM) at the Investment Advisory Committee (IAC). ◯ In conclusion, the current PAM needs not be revised as we confirmed the followings: • the current PAM is efficient and likely to achieve the required return, while the effect from the declining expected return of domestic bonds is observed, • Compared with the time when the current PAM was formulated, the risk that the GPIF’s asset would become smaller than the required level for the public pension system declines. Details of Periodic Review（Cf. Appendix） ◯ Based upon the third medium-term plans, the GPIF periodically reviews the PAM at the IAC. ◯ With regard to the required level of reserve fund over the long-term, several scenarios were presented in the Actuarial Valuation by the Ministry of Health, Labor and Welfare based on a number of economic assumptions. The Minister sets the medium-term objectives that the GPIF should achieve 1.7% of the real investment return (nominal investment return less nominal wage increase) for the long-term with minimum risks while securing liquidity for pension benefits payments based on the results of the Actuarial Valuation. ◯ In this periodic review, with regard to “Upside Scenario” whereby the economic revitalization plan is to be realized and “Downside Scenario” whereby implied forward interest rates on the yield curve are assumed to indicate economic prospect, we implemented followings: • We decreased expected return of domestic bonds, taking into account falling interest rates caused by the negative interest rate policy by the Bank of Japan and capital losses due to rising interest rates expected in the future. • We estimated probability that GPIF’s asset would become smaller than the required level at the end of assumed investment horizon (March 31st, 2039), with the starting point being the latest quarter end (December 31st, 2015). ◯ According to this periodic review, while the effect from the declining expected return of domestic bonds is observed, we confirmed that the current PAM is efficient and likely to achieve the required return, and the risk that GPIF’s asset would become smaller than the required level declines for each economic scenario. ◯ In conclusion, the current PAM needs not be revised.

＜Comments from President Norihiro Takahashi＞ We conducted a periodic review of the Policy Asset Mix with discussions held in three Investment Advisory Committee meetings in 2016. We stay vigilant to recent changes of market environment, continue to conduct a review from a long-term perspective, and take appropriate actions in accordance with the Policy Asset Mix which our Investment Advisory Committee has validated.

（Reference） The policy asset mix and actual composition at the latest quarter end Policy asset mix

Permissible ranges of deviation

Actual composition

Domestic bonds

35%

±10%

37.76%

Domestic equities

25%

±9%

23.35%

International bonds

15%

±4%

13.50%

International equities

25%

±8%

22.82%

Short-term assets

－

－

2.57%

Total

100%

－

100.00%

(December 31st, 2015)

Glossary Actuarial Valuation • Actuarial Valuation is held no fewer than once in five years by the Ministry of Health, Labor and Welfare to evaluate the present assessment and projections. The latest one was published in June 2014. • Japan’s public pension system is fundamentally managed as a pay-as-you-go system that incorporates intergenerational dependency, whereby contributions paid by working generations support older generations. In the light of a declining birthrate and an aging population, if the pension benefits were solely borne by the contributions from the working generations, either rising contributions or falling benefits would be required, therefore the fiscal plan assumes to hold a certain amount of reserve (GPIF) and make use of the investment incomes. GPIF（Government Pension Investment Fund） • The GPIF manages the pension reserve fund entrusted by the Ministry of Health, Labor and Welfare and its mission is to contribute to the stability of public pension system by achieving the investment return and distribute its proceed to the Pension Special Account. Policy Asset Mix • Policy Asset Mix (PAM) is a basic asset allocation of the GPIF to achieve investment objectives given the result of Actuarial Valuation. It is formulated from a long-term perspective based on the expertise generally recognized for asset management, macro-economic trends and a long-term perspective with forward looking risk analysis. • PAM was revised to the current one on October 31st 2014. • The GPIF properly manages portfolio risks based on market environment and periodically review the PAM. The PAM should be revised if the current economic situation significantly differs from the one assumed in formulating it. Permissible Ranges of Deviation • Permissible Ranges of Deviation is the ranges whereby actual composition of asset classes can be deviated from the PAM. • The GPIF can determine the asset allocation actively within the Permissible Ranges of Deviation given the proper assessments of market environment, however, these assessments should be based on certain foundations and it should never be speculative.

（Appendix）

Periodic Review of Policy Asset Mix １．Framework to Formulate Policy Asset Mix The Policy Asset Mix (PAM) on the second (revised in October 2014) and third medium-term objectives, is based upon the following philosophy: （１）Target Return Given the present assessment and projection on the pension finance (“Actuarial Valuation”) by the Ministry of Health, Labour and Welfare, the reserve asset (GPIF) must achieve a 1.7% “Real Investment Return” (nominal investment return less nominal wage increase) with minimum risks while securing liquidity for pension benefits payments. （２）Assumed Investment Horizon According to the Actuarial Valuation published in June 2014, the reserve asset level is to decrease for a while, then increase, peaking around the 25th years, and then decrease constantly. Hence, the assumed investment horizon was set to be 25 years, beyond which the investment policy should be more focused on the preservation of liquidity. （３）Assumed Two Scenario Instead of applying a long-term equilibrium rate, domestic bond return is based upon a scenario that interest rates are expected to rise for 10 years. This scenario is consistent with the Actuarial Valuation. We assumed “Upside Scenario” whereby the economic revitalization plan is to be realized and “Downside Scenario” whereby implied forward interest rates on the yield curve are assumed to indicate economic prospect. Future real long-term interest rates are set to be 2.7% in Upside Scenario and 1.9% in Downside Scenario respectively; future inflation rates are set to be 1.2% in Upside Scenario and 0.9% in Downside Scenario respectively.

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（４）Expected Returns and Correlations For domestic bonds, the average rate of return over the anticipated investment period, calculated based on recent long-term interest-rate scenarios as used in the Actuarial Valuation, is applied. With regard to expected returns of domestic equities, international bonds and international equities, we used a short-term interest rate plus respective risk premiums. We estimated the risks (standard deviations) of assets and the correlations among assets using historical data for the past 20 years. (Note) In estimating the risk of domestic bonds, the extension of duration in the future was taken into consideration.

（５）Profiles of Policy Asset Mix We identified a portfolio which meets the return requirement (nominal wage increase plus 1.7%) in both Upside and Downside Scenarios, and examined whether probability to underperform nominal wage increases smaller than all-domestic-bond portfolio and expected shortfall of the portfolio is the smallest.

２．Review of Policy Asset Mix The GPIF conducts a periodic review of the PAM subject to the medium-term plans. We verified the portfolio profiles using expected returns and standard deviations of each assets with the latest data until February 2016. Compared with October 2014 when we formulated the current PAM, the effects of declining expected return of domestic bonds are observed with long-term interest rates falling recently, but we confirmed that the current PAM is efficient and likely to achieve the target return. We also conducted simulations using several assumptions in this reviews to evaluate the distribution of reserve fund which will be managed over the long-term, and the risk that GPIF’s asset would become smaller than the level required in the Actuarial Valuations declines. This review (March 2016) was discussed in three Investment Advisory Committee meetings (March 10th, 29th and April 15th, 2016) and we concluded that the current PAM needs not be revised. We will continue to conduct a review if markets move significantly.

-2-

（１）Expected Returns Compared with October 2014, in this periodic review, with regard to real long-term interest rates (equilibrium interest rates) in the future, we maintained 2.7% for Upside Scenario but lowered to 1.5% for Downside Scenario based on the Actuarial Valuation as implied interest rates declined. We assumed a 1.2% inflation rate for Upside Scenario and 0.8% for Downside Scenario. The expected returns of domestic bonds declined in every scenario with long-term interest rates falling recently and we changed the path of interest rates to the equilibrium level. We used the same risk premium for domestic equities for Upside Scenario, but used a lower one for Downside Scenario in accordance with falling level of equilibrium interest rates. Although the latest data suggest higher risk premium of international bonds and equities, we also conservatively maintained the lower risk premium observed in October 2014, when we formulated the current PAM.

Upside Scenario (%) Downside Scenario (%)

Risk Premium of International Assets Unrevised Revised Unrevised Revised

Domestic Bonds

Domestic Equities

-0.4(2.3)

3.2(5.9)

-0.4(1.5)

2.8(4.7)

International Bonds

International Equities

0.9(3.6) 1.4(4.1) 1.2(3.1) 1.7(3.6)

3.6(6.3) 4.0(6.7) 3.9(5.8) 4.3(6.2)

Short-term Assets

Wage Increase

-1.6(1.1)

(2.7)

-1.1(0.8)

(1.9)

Note: Figures above indicate real returns. Figures in parentheses indicate nominal returns with the rate of increase in wages added.

Cf. October 2014

Upside Scenario (%) Downside Scenario (%)

Domestic Bonds -0.2(2.6) -0.1(2.0)

Domestic Equities 3.2(6.0) 3.1(5.2)

International Bonds 0.9(3.7) 1.4(3.5)

Note: Figures above indicate real returns. Figures in parentheses indicate nominal returns with the rate of increase in wages added.

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International Equities 3.6(6.4) 4.1(6.2)

Short-term Assets -1.7(1.1) -1.1(1.0)

Wage Increase (2.8) (2.1)

（２）Standard Deviations and Correlations Standard deviations of each assets and correlations between each assets were updated using data for the past 20 years until 2015.

Standard Deviation (%)

Correlation Domestic Bonds Domestic Equities International Bonds International Equities Wage Increase

Domestic Bonds 4.2 Domestic Bonds 1.00 -0.23 -0.04 -0.09 0.20

Domestic Equities 25.23 Domestic Equities

International Bonds 11.82 International Bonds

International Equities 26.78 International Equities

Wage Increase 1.85 Wage Increase

1.00 0.06 0.66 0.10

1.00 0.55 0.09

1.00 0.11

1.00

(Note) In estimating the risk of domestic bonds, the extension of duration in the future was taken into consideration.

Cf. October 2014

Standard Deviation (%) Correlation Domestic Bonds Domestic Equities International Bonds International Equities Wage Increase

Domestic Bonds 4.7 Domestic Bonds 1.00 -0.16 0.25 0.09 0.18

Domestic Equities 25.1

International Bonds 12.6

International Equities 27.3

Wage Increase 1.9

Domestic Equities

International Bonds

International Equities

Wage Increase

1.00 0.04 0.64 0.12

1.00 0.57 0.07

1.00 0.10

1.00

(Note) In estimating the risk of domestic bonds, the extension of duration in the future was taken into consideration.

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（３）Profiles of Policy Asset Mix (PAM) Risk Premium of International Assets

Real Return

Unrevised 1.70 Upside Scenario (%) Revised 1.87 Unrevised 1.72 Downside Scenario (%) Revised 1.89 Cf. Profiles of All-Domestic-Bond Portfolio Upside -0.40 Scenario (%) Downside -0.40 Scenario (%)

12.39

44.5 43.9 44.4 43.9

Expected Shortfall (Normal Distribution) 9.19 9.13 9.19 9.13

Expected Shortfall (Empirical Distribution) 10.83 10.81 10.82 10.81

2.30

4.20

53.76

3.53

4.10

1.50

4.20

53.76

3.53

4.10

Standard Deviation

Lower Partial Probability

4.40 4.57 3.62 3.79

Nominal Return

(Note 1) Although the return requirement is 1.7%, we assume a 2% allocation to short-term assets whose returns are very low. Hence, 1.7% target is adjusted to 1.77% in Upside Scenario and 1.76% in Downside Scenario respectively. (Note 2) “Expected Shortfall (Empirical Distribution)” is supplementarily estimated by Monte Carlo simulation based on historical data (Empirical Distribution) with consideration that equities may have larger downside probability than expected (“Tail Risk”).

Cf. October 2014

Upside Scenario (%) Downside Scenario (%) Cf. Profiles of All-Domestic-Bond Portfolio Upside Scenario (%) Downside Scenario (%)

44.4 43.8

Expected Shortfall (Normal Distribution) 9.45 9.38

Expected Shortfall (Empirical Distribution) 11.2 11.2

51.7 50.8

3.86 3.83

3.52 3.48

Real Return

Nominal Return

Standard Deviation

Lower Partial Probability

1.77 1.98

4.57 4.08

12.8 12.8

-0.20 -0.10

2.60 2.00

4.7 4.7

-5-

（４）Achievement of Assumed Level of Reserve Fund In order to quantify the risk that the reserve fund level assumed in the Actuarial Valuation would not be achieved, simulations are conducted by using several assumptions in this review. We set the starting point at December 31st, 2015 and evaluate the distribution of reserve fund which will be managed over the long-term. As a result, compared with October 2014 when we formulated the current PAM, the risk (probability) that the reserve fund would become smaller than the assumed level at the end of investment horizon (March 30th, 2039) declined mainly because the reserve fund increased particularly in fiscal year 2014. The probability that the reserve fund would become smaller than level assumed in the Actuarial Valuation Result of this Periodic Review Cf. October 2014

Unrevised Risk Premium of International Assets

Revised Risk Premium of International Assets

Upside Scenario

２４％

２１％

４０％

Downside Scenario

１８％

１４％

２５％

-6-

（trillion yen）

Reserve Asset Expectation（Upside Scenario：Unrevised risk premium ）

300

（trillion yen） 300

286.1 Bold line： reserve asset in the Actuarial Valuation

250 200

75 percentile 228.7 Median 75 percentile Median 25 percentile

100

142.6 134.4 126.7

Al l -domesticbond portfolio

50

2019

（trillion yen）

250 200

2024

2029

2034

223.7 75 percentile

150

Median

100

25 percentile 75 percentile Median

0

2039

（trillion yen）

Reserve Asset Expectation（Upside Scenario：Revised risk premium ）

300

297.2 Bold line： reserve asset in the Actuarial Valuation

75 percentile 237.3 Median

250

Pol i cy a sset mix 200

189.6

25 percentile

25 percentile

2019

2024

2029

2034

173.7

Pol i cy a sset mix

134.2 122.2 105.5 98.9 92.7

Al l -domesticbond portfolio

75 percentile Median 25 percentile

100

140.5 132.4 124.8

2039

Reserve Asset Expectation（Downside Scenario：Revised risk premium） Bold line： reserve asset in the Actuarial Valuation

240.1

75 percentile

180.8

150

186.7

Median

150

Al l -domesticbond portfolio

75 percentile Median 25 percentile

100

0 2019

2024

2029

2034

2039

（Note）”Reserve Asset Expectation” is expressed as real reserve asset (present value discounted by nominal wage increase).

-7-

2019

2024

2029

2034

Pol i cy a sset mix

144.4

25 percentile

50

50 0

Bold line： reserve asset in the Actuarial Valuation

50

0

300

250 200

180.8 182.5

25 percentile

150

Pol i cy a sset mix

Reserve Asset Expectation（Downside Scenario：Unrevised risk premium）

2039

122.2

105.7 99.1 92.9

Al l -domesticbond portfolio