Japan's Pension Funds Dump Domestic Bonds Despite Rising Yields

A $77 billion Japanese public pension fund is letting its domestic bond holdings slide to just 19% of total assets. In a world where yields are rising, shouldn't they be buying more, not less?

The Numbers Tell a Strange Story

Japanese public pension organizations are deliberately avoiding rebalancing into domestic bonds, even as Japanese Government Bond (JGB) yields climb higher. This breaks the fundamental rule of institutional investing: when your asset allocation drifts from target weights, you rebalance immediately.

But they're not. Instead, they're watching their JGB weightings shrink while bond yields rise on fiscal expansion concerns. It's like watching someone walk away from a sale at their favorite store.

Reading Between the Lines

This isn't just portfolio management—it's a vote of no confidence. When your own country's pension funds won't buy your government's debt, that sends a message. These fund managers have access to the same economic data, the same fiscal projections, and the same political intelligence as anyone else in Tokyo.

Meanwhile, foreign investors are piling into ultra-long JGBs. So we have domestic institutions selling what overseas investors are buying. Someone's reading the situation wrong.

The Ripple Effect

This trend matters far beyond Japan's borders. Japanese pension funds are among the world's largest institutional investors, and their asset allocation decisions move global markets. If they're rotating out of domestic bonds, where's that money going?

The implications for bond yields are significant. Less domestic demand means higher yields, which increases the government's borrowing costs—exactly what Japan's heavily indebted government doesn't need. It's a feedback loop that could accelerate if other pension funds follow suit.

For global investors, this creates both opportunity and risk. Rising JGB yields might look attractive, but if domestic institutions are selling for fundamental reasons rather than technical ones, that's worth considering.