Japanese Pension Funds Increase Domestic Bond Allocations

Japanese retirement funds are increasing their exposure to domestic bonds as they anticipate an acceleration of interest rate hikes by the Bank of Japan. A survey by JP Morgan Asset Management found that 10% of polled defined-benefit pension funds plan to increase domestic bond holdings, the highest proportion since 2008. While overall allocation to Japanese bonds stood at 14.3%, 73% of funds are considering buy-and-hold strategies to lock in stable yields, while interest in global bonds has dipped to 29.5% due to high hedging costs.

Simultaneously, the Government Pension Investment Fund (GPIF) held an unusual management committee meeting on August 21, the first such August gathering in seven years. Although the fund previously stated a review of its holdings was unnecessary, the meeting focused on asset allocation operations. This has led to speculation that the GPIF may raise its 25% allocation target for domestic bonds within its 318 trillion yen portfolio.

These shifts follow a surge in Japanese Government Bond yields, which reached 3.015% on Wednesday, the highest level since 1996. This trend is driven by expectations of Bank of Japan rate hikes to fight inflation and the expansionary fiscal policies of Prime Minister Sanae Takaichi. Analysts suggest that an increase in bond allocations by the GPIF could help ease the upward pressure on these debt yields.