According to information from individuals familiar with internal Japanese government discussions, there are currently no immediate plans to adjust the target asset allocation of the national pension fund. However, the government may direct more funds toward domestic assets within the existing permissible limits.
Last Friday, Japanese Finance Minister Shunichi Suzuki stated that the government would explore ways to encourage various pension funds, including the world's largest, the Government Pension Investment Fund (GPIF), to "significantly increase investment in Japanese financial assets." These remarks initially triggered a rise in the yen and Japanese government bonds, as markets anticipated the potential inflow of trillions of dollars into Japanese markets through the GPIF.
As of March this year, the GPIF managed assets totaling 293.6 trillion yen (approximately $1.81 trillion). However, two government sources have revealed that while the government is studying how to increase such investments within the bounds of the existing benchmark portfolio, this move will not immediately trigger a revision of the GPIF's medium-term targets. One source noted, "The market reaction was far beyond our expectations," while acknowledging that Suzuki's comments did not imply a change in the asset allocation structure. Both sources requested anonymity due to the sensitivity of the matter.
Following this news, the yen depreciated by up to 0.4% intraday on Monday, hitting a low of 162.36 yen per US dollar. Japanese government bond futures also extended their losses. At the time of writing, the US dollar was hovering around 162 yen, just a step away from its lowest level in four decades.
Prior to Suzuki's remarks, a draft of the government's economic blueprint had triggered selling of the yen and bonds, as the market interpreted it as the dovish-leaning government of Prime Minister Fumio Kishida pressuring the central bank to delay interest rate hikes. Subsequently, the minister responsible for the draft was forced to acknowledge that the wording would be revised to soothe market sentiment.
It is understood that, according to regulations, the GPIF's investment operations must be entirely centered on the interests of pension beneficiaries and cannot allocate funds to align with government policy direction. Under the current medium-term management plan, the GPIF allocates 25% each to domestic bonds, foreign bonds, domestic stocks, and foreign stocks. The target allocation for domestic bonds allows for a fluctuation of up to 6 percentage points.
The first source did not rule out the possibility of allocating more GPIF funds to domestic bonds within the permitted range. However, they also emphasized that pension fund investment decisions must be prudent, and any adjustments, even within the allowable deviation range, require sufficient and compelling justification.
Takashi Kiuchi, Executive Economist at the Nomura Research Institute, commented, "It is entirely possible for the GPIF to increase domestic investment within its existing discretionary range, without involving a fundamental review of the basic portfolio." He also noted that the government could guide the GPIF to adjust in this direction.
"As long-term interest rates rise, Japanese government bonds have become relatively more attractive as safe assets, and their yields have also improved," he added.
The GPIF's oversight is the responsibility of Japan's Ministry of Health, Labour and Welfare. When asked whether the government is considering adjusting the GPIF's asset allocation, the ministry declined to comment.
Chief Cabinet Secretary Yoshimasa Hayashi stated during a press conference on Monday, "The GPIF reviews its policy portfolio annually, manages risk in conjunction with market dynamics, and assesses whether there have been significant changes in the investment environment assumed when the portfolio was established."
He added, "To my understanding, if such changes indeed necessitate adjustments, the portfolio will be revised accordingly."
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