Japan Economic & Financial Weekly

Long-term and super-long-term JGB yield scenario for July 13-17

The JGB market is likely to be rangebound in the week of July 13. In the previous week, the yield on the newly issued 10-year JGB rose as high as 2.900%. In addition to concerns over fiscal expansion, expectations that the government would seek to discourage future rate hikes -- the “Basic Policy shock” -- accelerated the rise in the benchmark long-term yield. But at a press conference after a Cabinet meeting on July 10, Minister of State for Economic and Fiscal Policy Minoru Kiuchi stated that the BoJ’s autonomy must be respected, and that the government will not provide advance indications to the Bank of Japan regarding the timing or magnitude of rate hikes or rate cuts. Remarks by Finance Minister Satsuki Katayama at her own press conference that day also had a significant impact on the market. Ms. Katayama said that “we would like to pursue measures to encourage the GPIF and other pension funds to invest more in Japanese financial assets.” Market participants assumed this would result in the GPIF and other pension funds swapping out foreign-currency assets for JGBs and other yen assets, and JGB yields fell sharply on July 10, led by the long- and super-long-term sectors.

It is unclear whether the Takaichi administration has changed its stance and is now willing to tolerate further rate hikes or whether it has actually decided to review the GPIF’s policy asset mix. However, it has almost certainly grown more concerned about the rising 10-year bond yield and continued weakness in the yen. For now, at least, we think the government will confine itself to a neutral tone when commenting on BoJ monetary policy decisions. Meanwhile, it should be noted that the GPIF’s investment policy cannot be easily changed at the government’s behest. Pension reserves, comprising GPIF assets under management and reserves managed in the Pension Special Account, are managed in accordance with “medium-term objectives” set out by the Minister of Health, Labour and Welfare, not the Minister of Finance. Mid-term objectives are formulated and the policy asset mix determined every five years. The GPIF is currently in its fifth mid-term investment plan, which began in FY2025 and runs through FY2029. The target asset mix is shown in Table 1, and actual holdings as of end-March 2026 are summarized in Table 2. The policy asset mix is determined following deliberations by a working group of economic and financial experts and further discussion by the Board of Governors, based on a so-called fiscal audit of the public pension system conducted once every five years. Viewed in this light, Ms. Katayama’s remarks appear a little too casual, and the likelihood of such a review must be regarded a shighly uncertain at present. The effect of the finance minister’s remarks, which seemed like an attempt to “jawbone” the JGB market higher, may not last long, much like the government’s intervention on the forex market.