Could a Trillions-of-Yen Capital Rotation Be Triggered? Surging Yields Rekindle Appeal, Calls Grow for GPIF to Increase Holdings of Japanese Government Bonds

According to Zhihui Finance APP, as Japanese government bond yields have surged, analysts point out that one of the world's largest pension funds—the Government Pension Investment Fund of Japan (GPIF)—may have ample reason to consider raising its domestic bond allocation target from the current 25% to seek higher returns.

Data from GPIF shows that as of the April to June quarter this year, the fund has recorded losses in domestic bond investments for seven consecutive quarters. The losses were due to the persistent downturn in Japan’s bond market, with the benchmark 10-year government bond yield once approaching 3%, the highest level in nearly 30 years. However, analysts believe that the sharp increase in yields may, on the contrary, make them attractive to investors again.

Koji Okuda, Executive Researcher at Dai-ichi Life Research Institute, said, "When rising yields improve expected returns of domestic bonds, it is reasonable to consider adjusting the allocation ratio." He pointed out that the economic situation has changed compared to when the target was initially set, and that GPIF is now fully justified to examine whether its current weighting is still appropriate.

Due to the enormous size of the fund, GPIF's asset allocation decisions are closely watched by global market participants. As of the end of June, the fund managed assets of about 318 trillion yen (approximately $2 trillion). This means that theoretically, every 1 percentage point change in allocation could trigger a capital flow of over 3 trillion yen.

Meanwhile, Japanese Prime Minister Sanae Takaichi and Finance Minister Katsuki Katayama have also increased pressure on the pension fund, urging it to allocate more funds to the domestic market.

Okuda further stated, "After GPIF thoroughly assesses factors such as expected returns and risks under various economic scenarios, considering raising the domestic bond allocation ratio to 30% to 35% will be worthwhile."

Currently, signs of recovering demand for Japanese domestic bonds have begun to emerge. Japan's largest life insurance company, Nippon Life Insurance, stated last week that given the current attractive interest rate levels, it intends to become a net buyer of Japanese government bonds in the next fiscal year.

Increasing domestic bond allocations would also impact the currency market. According to Okuda's estimate based on GPIF positions at the end of June, if foreign bonds are reduced and domestic bonds are raised to 30%, about 16 trillion yen would need to be bought; if the target is raised to 35%, the purchase scale would expand to 32 trillion yen.

Kenichiro Ueno, Minister of Health, Labor and Welfare responsible for overseeing GPIF, said in July, "The basic investment portfolio will be adjusted if necessary." However, he also emphasized that the fundamental principle of investing is to generate returns for pension beneficiaries.

A GPIF spokesperson stated that the fund does not perceive any significant difference between the current investment environment and the expectations of the original portfolio.

The depreciation of the yen is also closely watched by investors. Kiyoshi Ishigane, Executive Chief Fund Manager at Mitsubishi UFJ Asset Management, said that considering foreign exchange risks, "it is not surprising to start considering reducing overseas assets and increasing the domestic bond ratio."

However, some analysts have expressed doubts about adjusting the target allocation ratio.

Takahiro Niimi, Senior Economist at NLI Research Institute's Policy Research Department, noted that if GPIF increases domestic bond weighting, it may have to assume more risk through other assets to achieve its investment return goals. "The threshold for adjustment is quite high," he said.

Kenji Shiomura, a researcher at Daiwa Research Institute and former GPIF official, believes that if wage growth factors are excluded, current interest rates have not risen significantly, so it is still unclear whether the domestic bond weighting should be increased.

The Adjustment Role of GPIF

Some believe that instead of changing the allocation target, it is sufficient to simply rebalance GPIF assets. After the Japanese stock market’s record-breaking rally, valuations have become relatively high, prompting investors to shift their focus to other assets such as domestic bonds. Masaki Kuwahara, Senior Rates Strategist at Nomura Securities, pointed out that as part of the rebalancing, GPIF injected 5.7 trillion yen into Japanese bonds in the April to June quarter, the highest single quarter since fiscal year 2020.

GPIF’s current basic investment portfolio started in the fiscal year ending March 2026 and is effective for five years. The portfolio aims for long-term returns of nominal wage growth plus 1.9 percentage points, striving to achieve this level while minimizing risk.

In the past, GPIF has adjusted allocations in the middle of planned cycles to achieve return targets. For example, in October 2014, based on expectations that deflation would soon ease, the fund sharply cut its domestic bond share from 60% to 35%, while raising the allocation ratios for Japanese and foreign equities from 12% to 25% respectively.