Dollar’s Strength Prompts Question: What Will Japan Do With Its Bounty of Bucks?

Tokyo’s piggy bank is called the Government Pension Investment Fund, the world’s largest of its kind with assets equivalent to $1.34 trillion as of June 30. That is about three times the size of the California Public Employees’ Retirement System, or Calpers.

Nearly a decade ago, the fund decided it needed to invest more aggressively to secure returns for a country where nearly two in five people will be 65 or older by the 2050s. It put half its money into non-Japanese stocks and bonds. The lion’s share of those foreign investments went to U.S. Treasurys, other U.S. bonds and stocks listed in the U.S.

As of March 31, GPIF had the equivalent of at least $385 billion in dollar-denominated stocks and bonds, a number calculated by adding up the U.S. investments in the fund’s published investment list. All but a small part of that isn’t hedged against currency fluctuations, according to GPIF.

In a boon for GPIF, the dollar is now worth 25% more in yen than it was at the beginning of this year. Earlier this month, the dollar topped 144 yen, the strongest level for the U.S. currency against Japan’s since August 1998.

That lifts the yen value of GPIF’s portfolio. Ultimately what matters to the fund is how many yen it has, because Japan pays out its pensions in local currency.

The dollar’s rise helped GPIF add ¥10 trillion, equivalent to $70 billion, to its stash in the year ended March 31, a return of 5.4%. It lost some of that in the April-to-June quarter, as global markets shuddered during the Ukraine war and China’s coronavirus lockdowns, but the current quarter is bringing in additional gains.

According to Yohei Iwao, an executive director at

Morgan Stanley MUFG Securities

in Tokyo, GPIF’s holdings of foreign stocks grew by 8.2% in yen terms as of Wednesday compared with the quarter’s end on June 30. Its foreign bonds, despite a fall in the Treasury market, were worth 1.7% more in yen terms, Mr. Iwao said.

Tokyo has expressed concern about the yen’s rapid depreciation. While a weak yen benefits Japanese exporters and GPIF, the currency’s rapid fall forces the country to pay more in yen terms for imported energy and food, which are already rising in price for other reasons including the Ukraine war.

On Wednesday, Finance Minister

Shunichi Suzuki

said Japan was reviewing all possible options to stabilize the market including government intervention to sell dollars and buy yen.

One way the Japanese government could sell dollars without seeming to do anything out of the ordinary would be to have GPIF rebalance its portfolio, selling dollar-denominated assets like U.S. stocks and buying bonds in yen. The calculations by Mr. Iwao at Morgan Stanley MUFG show that foreign stocks and bonds each accounted for between 25.2% and 25.3% of GPIF’s portfolio as of Wednesday—higher than the 25% target.

“When the yen falls, it naturally raises the possibility that GPIF would buy the yen to keep the weight of each asset class at 25%,” said MUFG Bank strategist Takahiro Sekido.

He said GPIF could buy a couple of trillion yen as part of its rebalancing, with ¥2 trillion currently equivalent to about $14 billion.

“This could serve as a stabilizer to the market,” Mr. Sekido said.

A GPIF spokeswoman declined to comment on any possible portfolio rebalancing.

What makes the decision sensitive is that GPIF has built a reputation as a professional manager of pension money, not a tool by which politicians can fix short-term problems like the high cost of imported oil. The fund’s principles call for it to make investment decisions with the goal of maximizing long-term returns for Japanese senior citizens.

Meanwhile, some analysts say GPIF shouldn’t celebrate its winnings from dollar-denominated investments too much, because currency markets could reverse and stock markets face further turmoil as the Federal Reserve aggressively raises interest rates.

Takahide Kiuchi,

an economist at Nomura Research Institute and former Bank of Japan policy board member, said GPIF’s portfolio “has become more exposed to the headwinds both of stock falls and the yen’s appreciation.”

Write to Megumi Fujikawa at [email protected]

Tokyo’s piggy bank is called the Government Pension Investment Fund, the world’s largest of its kind with assets equivalent to $1.34 trillion as of June 30. That is about three times the size of the California Public Employees’ Retirement System, or Calpers.

Nearly a decade ago, the fund decided it needed to invest more aggressively to secure returns for a country where nearly two in five people will be 65 or older by the 2050s. It put half its money into non-Japanese stocks and bonds. The lion’s share of those foreign investments went to U.S. Treasurys, other U.S. bonds and stocks listed in the U.S.

As of March 31, GPIF had the equivalent of at least $385 billion in dollar-denominated stocks and bonds, a number calculated by adding up the U.S. investments in the fund’s published investment list. All but a small part of that isn’t hedged against currency fluctuations, according to GPIF.

In a boon for GPIF, the dollar is now worth 25% more in yen than it was at the beginning of this year. Earlier this month, the dollar topped 144 yen, the strongest level for the U.S. currency against Japan’s since August 1998.

That lifts the yen value of GPIF’s portfolio. Ultimately what matters to the fund is how many yen it has, because Japan pays out its pensions in local currency.

The dollar’s rise helped GPIF add ¥10 trillion, equivalent to $70 billion, to its stash in the year ended March 31, a return of 5.4%. It lost some of that in the April-to-June quarter, as global markets shuddered during the Ukraine war and China’s coronavirus lockdowns, but the current quarter is bringing in additional gains.

According to Yohei Iwao, an executive director at

Morgan Stanley MUFG Securities

in Tokyo, GPIF’s holdings of foreign stocks grew by 8.2% in yen terms as of Wednesday compared with the quarter’s end on June 30. Its foreign bonds, despite a fall in the Treasury market, were worth 1.7% more in yen terms, Mr. Iwao said.

Tokyo has expressed concern about the yen’s rapid depreciation. While a weak yen benefits Japanese exporters and GPIF, the currency’s rapid fall forces the country to pay more in yen terms for imported energy and food, which are already rising in price for other reasons including the Ukraine war.

On Wednesday, Finance Minister

Shunichi Suzuki

said Japan was reviewing all possible options to stabilize the market including government intervention to sell dollars and buy yen.

One way the Japanese government could sell dollars without seeming to do anything out of the ordinary would be to have GPIF rebalance its portfolio, selling dollar-denominated assets like U.S. stocks and buying bonds in yen. The calculations by Mr. Iwao at Morgan Stanley MUFG show that foreign stocks and bonds each accounted for between 25.2% and 25.3% of GPIF’s portfolio as of Wednesday—higher than the 25% target.

“When the yen falls, it naturally raises the possibility that GPIF would buy the yen to keep the weight of each asset class at 25%,” said MUFG Bank strategist Takahiro Sekido.

He said GPIF could buy a couple of trillion yen as part of its rebalancing, with ¥2 trillion currently equivalent to about $14 billion.

“This could serve as a stabilizer to the market,” Mr. Sekido said.

A GPIF spokeswoman declined to comment on any possible portfolio rebalancing.

What makes the decision sensitive is that GPIF has built a reputation as a professional manager of pension money, not a tool by which politicians can fix short-term problems like the high cost of imported oil. The fund’s principles call for it to make investment decisions with the goal of maximizing long-term returns for Japanese senior citizens.

Meanwhile, some analysts say GPIF shouldn’t celebrate its winnings from dollar-denominated investments too much, because currency markets could reverse and stock markets face further turmoil as the Federal Reserve aggressively raises interest rates.

Takahide Kiuchi,

an economist at Nomura Research Institute and former Bank of Japan policy board member, said GPIF’s portfolio “has become more exposed to the headwinds both of stock falls and the yen’s appreciation.”

Write to Megumi Fujikawa at [email protected]