According to a Bloomberg survey, one of the world's largest retirement funds, the Government Pension Investment Fund (GPIF) of Japan, may increase its buying power in domestic Japanese stocks and reduce its investment in foreign bonds. This trend could have an impact on global markets.

GPIF may increase its investment in Japanese stocks.

GPIF was previously the world's largest pension fund with assets totaling $1.75 trillion. Due to the earlier depreciation of the yen this year, GPIF temporarily lost this position. However, with the recent rebound of the yen, GPIF may have regained its status as the world's largest retirement fund.

GPIF reviews its asset allocation target approximately every five years. The last asset allocation plan was announced on March 31, 2020, the day before the start of a new five-year period. Currently, GPIF allocates its assets evenly among four categories including Japanese and overseas bonds and stocks.

Among 21 analysts surveyed, nearly half believe that as part of the portfolio adjustments starting in April next year, the Japan Government Pension Investment Fund will raise the allocation target for Japanese stocks from the current 25% level. They anticipate that GPIF is unlikely to increase investment in foreign bonds as this would involve selling yen, which could weaken the yen.

After the Bank of Japan raised interest rates at the end of July, the Japanese stock market experienced a sharp decline.$Nikkei 225 (.N225.JP)$The index once experienced the largest single-day decline in decades. Although Japanese stocks have gradually rebounded from the previous plunge over the past month, on Wednesday, Japanese stocks plunged again, causing concerns among investors about the potential instability of Japanese stocks.

Against this backdrop, even a slight increase in GPIF's investment in Japanese stocks would boost market sentiment. By raising the allocation target for Japanese stocks by 5 percentage points, GPIF could potentially translate this into a net purchase amount exceeding 10 trillion yen (approximately $69 billion).

"Any action by GPIF will have a huge impact," said Shingo Ide, Chief Stock Strategist at Tokyo NLI Research Institute, "It has been 10 years since GPIF last increased its allocation to Japanese stocks."

May increase holdings of Japanese bonds and reduce allocation to foreign bonds.

All surveyed analysts expect that GPIF will maintain or increase its holdings in Japanese stocks. Some analysts suggest that the Japanese government may also want the fund to buy more Japanese stocks to help relieve the burden of retirement pensions and keep pace with accelerating inflation - despite GPIF claiming its sole mission is to serve pension recipients, analysts indicate that the fund may find it difficult to ignore the government's opinions.

In addition, 60% of analysts believe that GPIF may rebalance its portfolio ahead of the official statement, similar to what happened in 2014. In 2014, GPIF announced in October, but had already started buying Japanese stocks before that.

Regarding government bonds, the majority of respondents indicate that, given the rise in Japanese bond yields following the first interest rate hike by the Bank of Japan in March 2017, Japanese bonds may still remain a major part of GPIF's investment portfolio.

Considering the Bank of Japan's plans to gradually reduce bond purchases by the first quarter of 2026, some suspect that the Japanese government may want GPIF to buy more Japanese bonds.

In the 2020 assessment, the fund reduced Japanese bonds from 35% to 25% and increased foreign bonds from 15% to 25%, as the Bank of Japan's aggressive monetary easing policy led to a sharp decline in Japanese bond yields. Now, with the Bank of Japan's monetary policy shifting, GPIF's asset allocation direction may also undergo a reversal.

Editor/Rocky