USD/JPY Flows - GPIF window guidance could prove a notable shift
GPIF radical asset allocation overhauls in 2014 and 2020 were major events
Window guidance shifts could be significant especially if they ripple out more widely
Main action overnight in the yen and potentially quite a significant development over time both for the yen and local assets but also overseas assets and the surrounding carry.
The strategic asset allocation shift with the GPIF back in 2014 (radically shifting from 60% local bonds to 35%) and then further in 2020 (to the current 25/25/25/25) proved a significant input into the medium-term bond and yen trajectories both through its direct effect and through its sentiment effect.
While MoF don’t seem to be proposing a radical reversal of the Abenomics move, any significant shift back to local bonds could provide critical window guidance as well as flow effects and help turn around some of the medium-term expectations rigidity that has helped to weak the yen on a self-perpetuating weakening trend.
The fund itself is almost Y300trn but can provide further signalling and benchmark effects out more broadly out to other quasi-governmental (Japan Post etc) and wider pension/lifer funds. Pivotal flatten for JGBs (alongside the more explicit commitment to BoJ monetary policy independence) could help provide more significant yen support than intervention bursts at this point.
USD/JPY reaction has been limited thus far and still well clear of key near-term support around 160 ½, though JP10s have pulled back around 11bp off multi-year highs. It’s a key story to watch to see how the details emerge on this in terms of the timescale and approach of this review and the broader FX and asset implications.