Japan’s ¥159.2 trillion ($1.47 trillion) Government Pension Investment Fund announced changes Tuesday to its classifications of fixed income, opening the door for a continued shift in its allocations to foreign bonds from negative yielding Japanese government bonds.
GPIF President Norihiro Takahashi in comments posted on the fund’s website, said revisions to GPIF’s investment plans for the current fiscal year will allow currency-hedged foreign bonds to be counted toward the fund’s domestic bond totals and subtracted from its foreign bond totals for purposes of calculating permitted target allocations.
That change comes as GPIF’s investment update for the three months ended June 30 showed its allocation to foreign bonds climbing to a record 18.1% from 17% as of March 31, just shy of the asset class’s 19% ceiling — set by guidelines allowing allocations to range within 4 percentage points on either side of a 15% target.
Mr. Takahashi called the move a response to the current moment in capital markets, with negative yields offered by Japanese government bonds prompting the fund to seek substitutes capable of providing downside protection in a risk-off environment.
In Asian trading Tuesday, 10-year Japanese government bonds were offering a negative yield of roughly 16 basis points.
As of the March 31, ¥1.26 trillion of the fund’s ¥27.82 trillion in allocations to foreign bonds were currency hedged, a GPIF spokeswoman said in an email.
Foreign bond managers welcomed GPIF’s latest move, with the Tokyo office head of one firm predicting it will provide a good tail wind “for us and our competitors.” He declined to be named.
GPIF’s latest annual report for the fiscal year ended March 31 showed GPIF giving out more active mandates for foreign bonds, as a proportion of overall mandates, than any other asset class.
The fund’s active-passive mix for foreign bonds stood at 34% to 64% at the close of the latest year, higher than 24% to 76% for domestic bonds, 9% to 91% for domestic stocks and 10% to 90% for foreign stocks.
Tuesday’s reclassification exercise was GPIF’s second over the past 12 or 13 months. In September 2018, as the fund’s domestic bond allocations were closing in on the 25% floor dictated by its permitted range of 10 percentage points on either side of a 35% target, Mr. Takahashi announced that GPIF’s combined holdings of local bonds and cash would be counted toward that lower limit.
As of June 30, GPIF’s 27% allocation to domestic bonds and 5% allocation to cash left the fund 7 percentage points above that 25% floor.