Japan’s Government Pension Investment Fund (GPIF) has moved to increase its allocation to foreign fixed income by 10% as it pulls back on its exposure to domestic government bonds for the next five years.

Under its new policy portfolio, due to be implemented from today (1 April), the beginning of the Japanese financial year, the world’s largest pension fund will lift allocations to foreign bonds to 25% from 15%.

The ¥169trn (€1.43trn) pension fund said yesterday that its foreign bond allocation had increased “due to the relatively higher interest rates on these instruments”.

“The new policy portfolio meets the GPIF’s return targets or real investment returns of 1.7% with the lowest risk,” said the fund in an announcement.

The annual return on foreign bonds over the past decade was 4.18%, outperforming domestic bonds, which returned an average of 1.92% in the same period.

Ten-year US Treasury bonds are currently yielding 0.66% against their Japanese counterparts at 0.017%, even after US bonds yields have fallen in response to the Federal Reserve’s recent interest rate cuts to cushion the worsening impact from the COVID-19 crisis.

The fund had about ¥30.7trn (18.1%) of its portfolio in foreign bonds as of 31 December.

Under the new asset mix policy, GPIF’s allocation to domestic bonds will fall from 35%, a level set in 2014, to 25%, because of declining interest rates and lower bond yields in Japan.

GPIF has been gradually reducing its investment in Japanese government bonds over the years with the country trapped in low interest rates and a low growth environment. At its peak, GPIF had 60% of its funds under management invested in government bonds.

At the end of last year it had ¥42.2trn (24.9%) invested in domestic bonds.

GPIF has left its target allocation unchanged for both domestic and foreign equities – both remain at 25%. At 31 December, foreign and domestic equities accounted for ¥46.8trn and ¥42.4trn, respectively.

GPIF said: “In addition to the current deviation limits set for each asset class, new deviation limits for total bonds and total equities have been established in order to strengthen risk management on the equity side.”

With the higher allocation to foreign bonds, GPIF will increase its total foreign asset allocations to around 50%.

These asset allocation ratios are specified in set guidelines called the “basic portfolio”, which is reviewed every five years, in principle, to reflect allocations with contemporary market trends.

GPIF said the new policy was determined after 13 meetings of the board of governors and has been approved by the Social Security Council, an advisory panel to Japan’s Ministry of Health, Labor and Welfare.