Japan is calling its capital home, a move investors say will ripple across markets, could finally lift the yen and send 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 the sharpest surge in Japanese Government Bonds (JGBs) for nearly two years and lifted the yen from near multi-decade lows, as investors considered how a wave of money that had flowed abroad could soon rush back to Japan.
If that comes to pass — there are as yet no details — it could usher in one of the biggest shifts in years in global capital flows and be felt from Tokyo to New York.
“If they follow through, it could materially change the course of dollar/yen,” said Nathan Swami, Citi’s Asia-Pacific head of FX trading, while noting that U.S. interest rates will continue to influence market moves.
But having traded through years when Japan’s life insurers were relentless buyers of dollars, encouraged by then-Prime Minister Shinzo Abe directing GPIF to invest more abroad, Swami said a reversal would potentially be just as significant.
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. About $930 billion of those assets lie with the GPIF, the world’s biggest pension fund.
A GPIF spokesperson declined to comment on Katayama’s remarks on Friday. The yen rose about 0.4% to 161.76 per dollar while 10-year JGB yields dived 17.5 basis points to 2.7%.
Bond markets in Europe, the United States, Britain and Australia, which have already seen Japanese demand starting to waver, were broadly steady, with investors waiting to see whether the big shift sounded genuine.
“Japan has been a big buyer of international fixed income, especially at the long-end,” said Ales Koutny, head of international rates at Vanguard.
“If they are serious about moving a meaningful allocation towards JGBs, then we may start seeing term premia across the globe.”
Calling time on GPIF’s overseas pivot
Japan’s potential to trigger huge capital flows has almost legendary status in financial markets. The possibility of repatriations underpins the theory that the yen is a safe haven, which would rise in times of stress because Japanese investors could sell foreign assets en masse for cash.
Outflows have certainly sunk the yen, which has been unable to really climb since 2014 when, facing a rapidly aging population and dismal domestic returns, Abe pushed GPIF to stop hoarding JGBs and chase higher returns in equities abroad.
His ideological successor, Prime Minister Sanae Takaichi, is considering tapping the fund to reverse the trend at a time when it could help a struggling yen and channel returning money into growth projects that include AI, chips and defence.
And with the stock market humming and yields high enough to be attractive, other investors could soon follow suit.
The blue-chip Nikkei is up 36% so far this year on its way to successive record highs, while yields on benchmark 10-year bonds 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. “The yield pick-up at JGBs has become comparable to, or better than (U.S. Treasuries) on an FX-hedged basis.”
The run-up in yields also reflects waning confidence in Japan’s finances, which are already under strain, and the yen has stayed stubbornly weak despite interest rate hikes and this year’s record-sized currency intervention.
A similar move to deploy South Korea’s pension fund to support its currency has not gained traction yet. It could also complicate the Bank of Japan’s efforts to cut its bond holdings and encourage markets to set longer-term interest rates.
“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.”
There have only been five days in the last three decades when Japan’s 10-year bonds have rallied as hard as they did on Friday, however, suggesting expectations for a homecoming of cash to the debt market are high.
“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.”
Reuters
