By Rocky Swift and Ankur Banerjee
TOKYO, July 10 (Reuters) – Japan is calling its capital home, a move that investors say will ripple across global markets and could finally lift the yen and direct money into the prime minister’s artificial intelligence ambitions.
On Friday, Japanese Finance Minister Satsuki Katayama floated an idea to encourage the $1.8 trillion Government Pension Investment Fund (GPIF) and other retirement vehicles to increase their holdings of domestic assets.
Her words triggered an immediate surge in Japanese government bonds (JGBs) and lifted the yen from near multi-decade lows, prodding investors to consider that a wave of money that has flowed into overseas markets could soon rush back in.
“The big asset repatriation is the missing piece in Japan’s reflation journey,” said Fred Neumann, chief Asia economist at HSBC. “Despite rising interest rates locally, and a buoyant equity market, Japanese investors have shown little appetite so far to reduce their sizeable overseas holdings and to return funds to domestic markets.”
Japan held a record 561.75 trillion yen ($3.53 trillion) in foreign assets in 2025, making it the No. 3 global owner after Germany and China. A big chunk of those Japanese assets lie with the GPIF, the world’s biggest pension fund, which initiated a tectonic shift in its portfolio more than a decade ago. A GPIF spokesperson declined to comment on Katayama’s remarks.
At the moment, there are no more details on a potential GPIF redirection aside from the finance minister’s comments, so much is still up in the air. If it did come to pass, it could usher in the biggest shift in Japanese capital markets since the tide flowed out under a previous administration.
GPIF’S OVERSEAS PIVOT
In 2014, facing a rapidly aging population and dismal domestic returns, Prime Minister Shinzo Abe pushed the fund to abandon its conservative, bond-heavy hoarding and chase higher returns in equities and overseas assets.
Now his ideological successor, Prime Minister Sanae Takaichi, is considering using the same fund to support domestic assets and potentially channel returning money into her growth projects that include AI, chips and defence.
Much has changed since Abe’s time. The blue-chip Nikkei share gauge is up 36% so far this year on its way to successive record highs, while yields on benchmark 10-year JGBs jumped to their highest point since 1996 on Thursday.
“It is an appropriate time to re-assess the allocations in domestic versus overseas assets,” said Frances Cheung, head of FX and rates strategy at OCBC. “For example, the yield pick-up at JGBs has become comparable to, or better than USTs on an FX-hedged basis.”
The run-up in JGB yields may be good for investors, but it signals waning confidence in Japan’s finances, which are already under strain. Meanwhile, the yen has remained stubbornly weak despite the Bank of Japan’s rate hike to a 31-year high in June and the government’s record intervention in currency markets in April and May.
“They are also kind of running out of ideas on how to support the currency,” said IG market analyst Fabien Yip. “Trying to change the issue structurally or fundamentally, which is to create more flows into yen-denominated assets, would be supportive of the currency in the longer term.”
For more than a decade, the BOJ was the Japanese market’s biggest buyer, hoovering up half of the JGB market and about 37 trillion yen worth of stock funds in its bid to prop up the flagging economy and beat back deflation.
But the central bank has since shifted course, working to normalise policy and shrink its balance sheet, a retreat that has left a void in the public markets.
WHAT CAN REPLACE THE BOJ?
“When the GPIF last undertook a major change in portfolio allocations, the yen was very strong and rates in Japan were very low. The world has changed since then,” said Stefan Angrick, director at Moody’s Analytics in Tokyo. “The Bank of Japan has turned into a net seller as JGBs roll off its balance sheet faster than it buys new ones.”
But the GPIF is not the BOJ. The central bank can print the yen that it uses to buy bonds, an essentially limitless tool. The GPIF’s firepower is bound by the size of its existing portfolio, and any pivot toward Japanese assets may necessitate selling foreign ones.
Notwithstanding the immediate boost to the yen and JGBs, some analysts doubt the effect will last. Some see Katayama’s comments as aspirational rather than binding, and they warn that shifting a portfolio as large as the GPIF’s would take a long time. Left unresolved are concerns over Japan’s enormous debt burden and budget deficits that no amount of pension money can paper over.
“It sounds like deja vu,” said Norihiro Yamaguchi, lead Japan economist at Oxford Economics, pointing to South Korea’s push in December to get its pension fund to defend the won. “I doubt it will be enough to change the game, given underlying fundamentals suggesting persistent yen weakness.”
(Reporting by Rocky Swift in Tokyo and Tom Westbrook in Singapore; Addional reporting by Rae Wee, Ankur Banerjee, Junko Fujita and Satoshi Sugiyama; Editing by Thomas Derpinghaus)
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