Japan’s bond meltdown spurs speculation over GPIF portfolio shift
Move could help arrest the spike in yields by increasing its asset allocation to the country’s government bonds
INVESTORS gaming out how Japan can calm its volatile bond market and prop up the yen see a possible answer in the US$1.8 trillion Government Pension Investment Fund (GPIF).
As the world’s largest pension fund – and a trend setter for other Japanese institutions – GPIF could help arrest the spike in yields by increasing its asset allocation to the country’s government bonds, they say.
The shift would be coupled with a reduced target for holdings of foreign bonds, notably US Treasuries, in the process easing selling pressure on the Japanese currency.
The fund, which takes a long-term perspective on its portfolio structure, declined to comment on the prospect of any change. While GPIF completed a five-yearly review of its portfolio in 2025, an early rethink is being raised by market participants after last week’s meltdown in Japanese government bonds (JGBs) and indications of potential government intervention to support the yen.
“The clear solution is for GPIF to sell foreign bonds and buy JGBs,” Brent Donnelly, the president of Spectra Markets and a former currency trader, said in a note.
“GPIF currently holds around US$400 billion of foreign bonds and a change in allocation there would send a strong signal for the start of a Japanese repatriation theme. This would be enormously bullish for JGBs and the yen at the same time.”
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The talk of such a shift gained traction after last week’s bond rout propelled long-term yields to historical peaks and sent ripples across global markets.
The scale of the move has put officials on alert in Tokyo and Washington, with the yen rebounding sharply after sliding to an 18-month low as traders cited signs the US may join Japan to defend the beleaguered currency.
Japanese public pension funds have increasingly become the steady domestic buyer of government bonds as the Bank of Japan steps back.
They have bought a net 28.2 trillion yen (S$229 billion) of sovereign debt since the fourth quarter of 2022, based on central bank data adjusted for redemptions. By contrast, the Bank of Japan (BOJ) has fallen behind, with slowing purchases failing to offset bonds rolling off its balance sheet.
GPIF reviews its model portfolio once every five years. At its latest review in 2025, effective from Apr 1, the fund said it would keep assets evenly split between stocks and bonds.
Between those cycles, however, the fund may assess its strategic allocation and can make revisions when deemed necessary, GPIF says. In 2014, GPIF unveiled a major portfolio shift outside its regular review timetable following the BOJ’s expansion of quantitative easing.
A GPIF spokesperson said investments are conducted in line with the basic portfolio from a long-term perspective.
Under pressure to improve long-term returns amid Japan’s ageing population, GPIF gradually raised its exposure to overseas assets over the past decade. The move, combined with the BOJ’s massive easing, added to downward pressure on the yen.
As per its current investment plan, the fund which is one of the world’s largest retirement pools, allocates assets evenly across Japanese and foreign stocks and bonds – 25 per cent each – and targets returns of 1.9 percentage points above nominal wage growth.
The potential diversion has significant implications for US Treasuries with GPIF among its biggest investors globally.
GPIF held 51.8 per cent of its foreign bond holdings in Treasuries at the end of March 2025, the highest since data became available in 2015, according to data compiled by Bloomberg, as elevated global yields and a weak yen spurred outbound flows.
“It is not our base case, but we think it is a risk we should be considering into the end of March,” said Stephen Spratt, a rates strategist at Societe Generale SA. “From a political perspective, this would help solve two major issues for the administration. There would be less net buying of overseas assets from this community, removing some pressure on the yen. This would also support long-end JGBs.”
Still, market experts are reining in hopes of aggressive buying of JGBs, citing an agreement between the two nations which says, “government investment vehicles such as pension funds continue to invest abroad for risk-adjusted return and diversification purposes, not targeting exchange rates for competitive purposes”.
Public pensions’ JGB holdings at 67.6 trillion yen remain far smaller than the BOJ’s 522.2 trillion yen as at the third quarter of 2025. But strategists say even a modest shift – or a clear signal – could help steady sentiment in a market where investors have been wary of the heightened volatility at the super-long end.
“An emphatic backstop in the JGB market means that those afraid of ‘catching falling knives’ could find the confidence to get back in,” said Vishnu Varathan, head of macro research, Asia ex-Japan at Mizuho Securities. “JGB yields are already turning increasingly attractive,” he said while the market moves were “daunting”. BLOOMBERG
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