Santander Bank: Japan GPIF does not need to adjust asset allocation policy, $62 billion may face sell-off

According to Golden Ten Data, analysts at Banco Santander indicate that Japan’s Government Pension Investment Fund (GPIF) could sell as much as $62 billion in U.S. Treasuries without formally adjusting its asset allocation policy.

Last month, GPIF management held a highly unusual meeting that drew considerable public attention. The $2 trillion investment institution is reconsidering its allocation to foreign bonds and is leaning toward moving into domestic bonds, sparking speculation of a comprehensive investment strategy overhaul. Kazuyuki Uenishi, Japan’s Minister of Health, Labour and Welfare, who oversees the fund, said on Tuesday that officials are still deliberating whether an evaluation of the asset allocation is necessary.

However, the team led by Antonio Villarroya, Global Head of Fixed Income, FX, and Commodities Strategy at Banco Santander, believes current policies already grant fund managers sufficient flexibility to sharply reduce exposure ahead of any formal review. They noted that the risk of divestment is greatest for U.S. Treasuries.

In a report to clients, Villarroya and his team wrote: “Given the flexibility of their strategic allocation range, they could start reducing foreign bond holdings in the coming months without waiting for an official review of the strategic asset mix.” This scenario becomes particularly likely if the Bank of Japan manages to reverse yen weakness through successive rate hikes.

For decades, ultra-low interest rates have driven Japanese investors to seek returns overseas, making the country one of the world’s largest exporters of capital. According to U.S. Treasury data, Japan is the largest foreign holder of U.S. Treasuries, with holdings of $1.1 trillion.

Now, this pattern is changing. Spurred by concerns about inflation and fiscal expenditure, along with market expectations that the Bank of Japan may need to raise rates more quickly, Japan’s 10-year government bond yield reached 3% last week, the first time since 1996.

Yields on Japanese government bonds have touched multi-decade highs, with 10-year yields returning to 3% for the first time since 1996.

GPIF currently targets allocating 25% of its assets to foreign bonds, allowing a variance of five percentage points either way. Banco Santander’s analysis modeled two scenarios: one in which GPIF reduces foreign bond holdings to 20% of the portfolio, remaining within the current policy range; and another in which it changes the method it uses to track the FTSE World Government Bond Index. Villarroya and colleagues said, “By leveraging this flexibility, GPIF can calmly reconsider whether to ultimately design a new asset allocation strategy for the years ahead.”