Japan's Government Pension Investment Fund, Tokyo, announced a new policy portfolio mix favoring foreign fixed income at the expense of domestic government bonds for the next five years.
The ¥169 trillion ($1.5 trillion) pension fund giant said Tuesday that the weight of foreign bonds in its portfolio will rise to 25%, 10 percentage points higher than the 15% target set five years ago.
Japanese government bonds, meanwhile, will drop to a target allocation of 25% from the 35% mark announced in October 2014 — which itself was a dramatic fall from a previous weighting of 60%.
The decrease in the fund's domestic bond allocations was tied to the "relatively higher interest rates" available on foreign bonds, said an announcement posted Tuesday on GPIF's website.
Late in the Asian trading day Tuesday, the yield on the 10-year Japanese government bond was around 1.7 basis points. For much of the past year, the yield on the benchmark bond was stuck in negative territory.
The new policy portfolio left target allocations for all four GPIF market segments — local and foreign bonds, local and foreign stocks — at 25% apiece.
The fund's operating instructions allow actual allocations to range by 7 percentage points on either side of the 25% targets for domestic bonds and foreign equities, 8 percentage points on either side for domestic equities and 6 percentage points on either side for foreign bonds.
The cut in the fund's domestic bond allocation target came after GPIF's guidelines were tweaked twice last year to pave the way for lower allocations. First, the fund was allowed to count its cash holdings toward its domestic bond totals, followed later in the year by a change categorizing yen-hedged foreign bonds also as domestic bonds.
The changes allowed GPIF executives to push allocations below the 25% floor for Japanese government bond holdings determined by the current policy portfolio's 10-percentage-point range on either side of its 35% target.
On Tuesday, documents posted on GPIF's website affirmed that those two adjustments would remain in effect. with both yen-hedged foreign bonds and yen-denominated cash counting as domestic bonds while cash held in foreign currencies would count toward the fund's foreign bond totals.
The fund had 18.1% of its portfolio, about ¥30.7 trillion, in foreign bonds as of Dec. 31. All other things equal, that would imply room to shift just under ¥12 trillion more into foreign bonds to reach the 25% target.
Another 1.1% of the portfolio, or ¥1.9 billion, was in yen-hedged foreign bonds — counted toward GPIF's domestic bond total.
Money held in actual Japanese government bonds, meanwhile, came to 24.9% of the portfolio, or ¥42.2 trillion yen. A further 3.4%, or ¥5.7 trillion, was in cash — bringing the broadly defined domestic bond weighting to 29.4%.
Foreign equities accounted for 27.6% of the portfolio, or ¥46.8 trillion, as of Dec. 31, while domestic equities stood at 25%, or ¥42.4 trillion.
With markets plunging over the past five weeks due to the coronavirus crisis, GPIF's portfolio as of the March 31 end of the fiscal year could be facing an estimated loss of more than $180 billion, according to Pensions & Investments' analysis.