Yen appreciation and global bond slump lead Japan GPIF to first loss in six quarters, with almost no asset allocation adjustment

According to information from Zhihui Finance APP, the latest quarterly report of Japan's Government Pension Investment Fund (GPIF) shows that in the three months ending September 30, its asset allocation remained almost unchanged compared to the model portfolio, with domestic bonds and equities still close to the 25% target, indicating no significant shift in its investment stance. However, due to the sharp decline in global bond prices and the appreciation of the yen, the fund recorded a 1.7% quarterly loss during the same period, the first in six quarters.

Allocation data reveal that GPIF allocated 26.49% of its portfolio to Japanese bonds and 24.80% to Japanese stocks. Both are within the narrow range the fund has stuck to in recent years, although it is permitted to deviate 5 to 6 percentage points from the 25% target. The allocation to Japanese bonds rose from 25.59% in June to 26.49%, but this ratio often increases in March and September due to seasonal patterns in the cash management of Japan's pension system.

For months, the market has been abuzz with speculation that the fund—one of the world’s largest public pension investment institutions, with assets of 314.4 trillion yen (about $2 trillion)—might shift more capital into the domestic market, which could boost Japan's stock and bond markets.

Prime Minister Sanae Takaichi hinted in July that GPIF might increase its holdings of domestic assets, and an unexpected management meeting in August further fueled such speculation. However, the latest data indicate the fund is maintaining the status quo, which may dampen market expectations for adjustments in the near term.

Koji Okuda, Executive Researcher at Dai-ichi Life Research Institute, stated that GPIF seems to have hardly utilized the deviation range allowed by its model portfolio; as of the end of September, the fund appeared to rebalance its portfolio back to the 25% target as it had done in the past. “Based on these results alone, there is no sign that GPIF is moving toward changing its model portfolio.”

According to analysts, increasing domestic asset holdings could support Sanae Takaichi's agenda by curbing yen weakness and lowering Japanese government bond yields, as she seeks to expand fiscal spending to stimulate growth. However, for GPIF, the threshold for adjusting allocations is very high. The fund emphasizes that its sole objective is to ensure pension payments for future generations.

Market participants say that without a clear investment rationale, GPIF is unlikely to adjust its positions; however, since the Ministry of Health, Labour and Welfare, which oversees the fund, has influence in setting target returns, the possibility of change cannot be ruled out.

The performance figures, released the same day as the allocation decisions, showed that in the three months to September, GPIF's quarterly return was -1.7%, the first loss in six quarters, due to the decline in global bond prices and the stronger yen.

The fund reported a quarterly loss of 5.253 trillion yen (about $33.3 billion), with total assets at 314.4 trillion yen. Japanese equities delivered a positive return of 3.71%, but foreign bonds, domestic bonds, and overseas equities posted losses of 6.52%, 1.80%, and 1.86%, respectively.

In September of this year, renewed tensions in the Middle East pushed oil prices higher, intensifying market concerns over inflation and accelerating the decline in bond prices.

During the quarter, the MSCI World Equity Index rose 1.3%, the S&P 500 gained 2.0%, and the TOPIX advanced 2.9%; the yield on 10-year US Treasuries rose by 81 basis points and Japan’s benchmark government bond yield increased by about 38 basis points; the US dollar fell more than 3% against the yen. Despite the overall loss, GPIF's domestic and foreign bonds outperformed their benchmarks by 5 and 13 basis points, respectively, Japanese equities underperformed the benchmark by 8 basis points, and overseas equities matched the benchmark.