GPIF Would Be Justified in Buying More Japan Bonds, Analysts Say Nao Sano Japanese bond yields have climbed so sharply that analysts say Government Pension Investment Fund may be justified in eventually raising its domestic debt allocation target from 25% to seek higher returns. The retirement fund manager, one of the world’s biggest, lost money on domestic bonds for seven straight quarters through the April-June period, according to its data. The losses came as Japan’s debt market tumbled, with benchmark 10-year government bond yields nearing a 30-year high of 3%.

But that surge in debt yields may have lifted them to levels that are appealing for investors, analysts say. GPIF has scope now to examine whether its current weightings still make sense considering economic developments, compared with when the targets were first formulated, he said. GPIF’s allocation decisions are closely watched by global market players because of the sheer size of the fund: the organization managed about ¥318 trillion ($2 trillion) in assets at the end of June.

That means that on paper a 1 percentage-point change in allocations can translate to more than ¥3 trillion in fund flows. Prime Minister Sanae Takaichi and Finance Minister Satsuki Katayama are also stepping up pressure on pension funds to park more of their funds in the home market. It would be worthwhile to consider raising the domestic bond allocation to 30-35% after GPIF checks factors such as expected returns and risks under multiple economic scenarios, Daiichi Life’s Okuda said.

In a sign of reviving domestic demand for bonds, Nippon Life Insurance Co. is open to becoming a net buyer of JGBs next fiscal year as it finds current interest rates attractive, an executive at Japan’s largest life insurer said last week. An increase in domestic bond allocations would also have an impact on the currency markets. Based on Okuda’s calculations of GPIF’s holdings at the end of June, reducing foreign debt and increasing domestic bonds to 30% of its assets would require about ¥16 trillion worth of yen buying, and that would go up to ¥32 trillion if 35% is the goal.

Japan’s health, labor and welfare minister, Kenichiro Ueno, whose ministry oversees GPIF, said in July that “if there’s a need, the basic portfolio will be revised.” But he added that investments are basically conducted to profit pension beneficiaries. A GPIF spokesperson said the fund doesn’t view the current investment environment to be that different from what the portfolio projected. The yen’s weakening is also being monitored by investors.

Considering foreign exchange risks, “it wouldn’t be strange to start considering whether to reduce overseas assets and increase the ratio of domestic bonds,” said Kiyoshi Ishigane, executive chief fund manager at Mitsubishi UFJ Asset Management. Some analysts question whether target allocations should be changed. Takahiro Niimi, senior economist of the policy research department at NLI Research Institute, said that if GPIF raised its domestic bond weighting, it would likely have to take more risks with other assets to meet its investment goals.

Kenji Shiomura, a former GPIF official who is now a fellow at Daiwa Institute of Research, said interest rates haven’t climbed much when wage growth is stripped out as a factor, making it unclear whether domestic bonds weightings should be increased. There’s also the view that rather than changing allocation targets, rebalancing GPIF’s assets is enough. Japanese shares have become expensive after their record rally and investors are looking at other assets including domestic bonds.

As part of its rebalancing, GPIF pumped ¥5.7 trillion into Japanese debt in the April-June period, the most in a quarter.