In financial markets over the past few days, buying of yen bonds and the yen has been progressing synergistically, driven by speculation over U.S. intentions and changes in the policy rate outlook for Japan and the U.S., as well as the presence of the Government Pension Investment Fund (GPIF), which manages assets worth 300 trillion yen. In August, GPIF held its management committee meeting for the first time in seven years, and the agenda included a report item titled "Discussion in the Working Group on Basic Portfolio Verification, etc." In March, the committee reported that no review was necessary, and re-discussing it just five months later is extremely unusual, according to Kenji Shiomura of Daiwa Institute of Research. In the market, since a 1% change in GPIF's asset allocation would result in a fund movement of about 3 trillion yen, expectations of increased investment in domestic bonds are strengthening the view that this would lead to a stronger yen and higher bond prices. The current basic portfolio allocates 25% each to domestic and foreign bonds and stocks, with deviation allowances of plus or minus 6% for domestic bonds, domestic stocks, and foreign stocks, and plus or minus 5% for foreign bonds. According to estimates by Rinto Maruyama of SMBC Nikko Securities, the current allocation is 26.91% in domestic bonds and 23.81% in domestic stocks, and if all deviation allowances were directed toward yen asset purchases, yen buying of up to 30 trillion yen could occur. GPIF has explained that it will verify the portfolio each fiscal year in response to changes in market conditions and consider a review if necessary, but actual discussion will have to wait for the minutes of the meeting, which are expected to be published in a few months.
Speculation that GPIF will shift toward domestic bonds/yen assets drives yen buying, strengthening the yen against the dollar.
GPIF is reportedly re-discussing its basic portfolio review, potentially shifting asset allocation toward domestic bonds, but no decision has been made.
