Japan signals pension push into domestic assets, sparking rally in yen, bonds

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TOKYO, July 10 : Japan's finance minister said on Friday the government aims to steer the country's vast state pension funds to "substantially" lift investments in domestic assets, sparking gains in the yen and bonds as investors bet billions of dollars could be channelled into Japanese markets.

The comments put the spotlight on the Government Pension Investment Fund (GPIF), the world's largest pension fund, which managed 293.6 trillion yen ($1.8 trillion) in assets at the end of March. Any shift in its portfolio strategy would reverberate across global financial markets.

"We would like to pursue measures that would encourage pension funds, including GPIF, to make substantially greater investments in Japanese financial assets," Finance Minister Satsuki Katayama said at a regular press conference.

The prospect of GPIF directing more money into yen-denominated bonds and other domestic assets could be a game changer for Japanese markets. Investors responded swiftly, driving gains in both the yen and JGBs on expectations that a sizeable pool of pension capital may be steered home.

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The yen, which has been under selling pressure for months and hit 40-year lows last week, jumped on Katayama's remarks and was up 0.6 per cent at 161.44 per dollar. Benchmark 10-year JGB yields made their steepest drop in a month, falling 10 basis points to 2.775 per cent. [JP/]

The latest news also highlights how urgently Tokyo is searching for ways to anchor markets buffeted by sharp swings in bond yields and the currency. With government spending remaining expansive and the Bank of Japan moving cautiously on rate hikes, officials face growing questions over inflation pressures, currency and bond market stability and Japan's fiscal outlook.

"I think with the currency situation that we're seeing, with yen at close to 40-year lows against the dollar, and they are also kind of running out of ideas on how to support the currency," Fabien Yip, market analyst at IG, said.

Efforts to drive a structural or fundamental change, "which is to create more flows into yen-dominated assets, would be supportive of the currency in the longer term," he said.

EMBATTLED YEN PRESSURES POLICYMAKERS

The yen's prolonged weakness has become a growing headache for policymakers, inflating the cost of imported raw materials and worsening the squeeze on households and businesses already grappling with higher energy prices linked to the Iran war.

The GPIF maintains roughly equal allocations to domestic equities, foreign equities, domestic bonds and foreign bonds.

At its review in 2020, the GPIF raised its allocation of foreign bonds to 25 per cent from 15 per cent and cut its allocation of domestic bonds to 25 per cent from 35 per cent.

A spokesperson at GPIF declined to comment on Katayama's remarks.

"The current basic portfolio was formulated to achieve, over the long term and with the minimum necessary risk, the investment targets set by the welfare minister," the spokesperson said.

The fund assess the portfolio annually as appropriate, she added.

Katayama said Japan is transitioning to a new growth-driven economy under Prime Minister Sanae Takaichi's administration and has entered a period of positive interest rates with higher stock markets. "The government wants to help households directly benefit from gains generated by economic growth," she added.

Katayama's remarks came as concern over the administration's expansionary fiscal policy and risk of political interference in monetary policy sparked a selloff on Japanese government bonds (JGB), pushing yields to multi-decade highs.

Those worries intensified after the Takaichi government's draft economic blueprint said it was "very important for monetary policy to be guided appropriately to achieve a stronger economy."

The final version of the economic blueprint is expected to be approved by cabinet on July 21, government sources told Reuters.

($1 = 161.8700 yen)

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