Japan’s Public Pension Fund Steps Up as BOJ Mulls Bond Cuts


(Bloomberg) -- Japan’s Government Pension Investment Fund is emerging as an important source of demand for the nation’s debt just as the central bank plans to reduce bond purchases.

The GPIF’s holdings of government bonds increased 25% to ¥50.3 trillion ($311 billion) in the fiscal year ended March 31, according to Bloomberg analysis of data from the fund released last week. This happened just as the proportion of the nation’s treasury bills, non-government debt and a currency-hedged foreign debt in its portfolio all fell.

While the GPIF’s holdings of government bonds are less than a 10th of the Bank of Japan’s, the fund’s tendency to buy on dips helps limit losses in the fixed-income market, especially when it’s weighed down by concern over a rapid decrease in the BOJ’s debt buying. 

“The GPIF’s increase in government bond holdings is providing significant support for the debt market,” said Ataru Okumura, a senior interest-rate strategist at SMBC Nikko Securities Inc. in Tokyo. 

“While there was a rebalancing from stocks to yen bonds during the fiscal year, in reality it wasn’t possible to invest in corporate bonds on a scale of trillions of yen, which is probably why purchases were centered on government bonds,” Okumura added. “If rebalancing occurs again, it’s highly likely that the GPIF will buy government bonds from a liquidity perspective.”

At the end of March, Japanese government bonds made up 89% of GPIF’s local debt holdings worth ¥56.5 trillion, up from 81.3% three years ago. The share of T-bills fell to 1% from 4.5% and other debt to 10% from 14.3% during this period.

The GPIF probably refrained from boosting holdings of corporate bonds because credit spreads have become quite tight, said Akio Kato, a senior manager of the strategic research and investment division at Mitsubishi UFJ Asset Management Co.

Currency-hedged foreign debt such as Treasuries, US mortgage-backed securities and European government bonds that was classified as Japanese bonds decreased to ¥1.35 trillion from ¥3.41 trillion in March 2021.

The GPIF’s footprint in the market is visible.

Trust banks, often seen as proxies to pension funds, have outpaced other investors in buying government bonds in the past year after adjusting for interest-rate risks, according to Bloomberg analysis of data from the Japan Securities Dealers Association.

The BOJ is expected to release a plan to substantially reduce its debt buying at the next policy decision later this month. The nation’s largest lenders this week called on the central bank to make deep cuts to its monthly bond purchases currently at about ¥6 trillion.

“I expect the bond-purchase target to be reduced” to ¥4 trillion to ¥4.5 trillion, said Frances Cheung, head of foreign-exchange and rates strategy at Oversea-Chinese Banking Corp. in Singapore. “If the 10-year JGB is allowed to be driven more by market forces, there is upside to its yield.”

The government appears well aware of such a risk. For one, the Ministry of Finance is weighing a shift in debt issuance to shorter maturities.

“With life insurers not buying bonds very much, it wouldn’t be surprising that the government has expectations for the GPIF to buy more of them” for smooth absorption of debt supply, said Eiichiro Miura, head of Nissay Asset Management Corp.’s strategic investment department.

--With assistance from Hidenori Yamanaka and Daisuke Sakai.

(Adds strategist comment in 12th paragraph.)

©2024 Bloomberg L.P.

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