FXStreet (Bali) - Yujiro Goto, FX Strategist at Nomura, notes that the full-scale GPIF portfolio shift has not started yet, adding that it is expected that the introduction of the new basic portfolio will accelerate JPY weakness.

Key Quotes

"The Government Pension Investment Fund (GPIF) moderately reduced the share
of domestic bonds in its portfolio again in Q2, according to its financial results. The share of domestic bonds fell to 53.4% from 55.4%, the lowest ever. By contrast, the share of domestic equities increased to 17.3% from 16.5%. The shares of foreign equities and short-term assets also increased slightly. The shift from domestic bonds to risky assets continued in Q2."

"That said, most of the changes in portfolio share can be explained by valuation effects, and actual portfolio flows in Q2 were limited. GPIF's domestic equity exposures increased to JPY22.0trn ($211bn) in Q2 from JPY20.8trn in Q1 (+JPY1.124trn). Returns from domestic equity exposures during the same period were JPY1.069trn, so we estimate the fund's net buying of domestic equities in Q2 to be only about JPY55bn ($0.5bn). The increase in foreign equity exposures is completely owing to the valuation effect as well. Trust banks, which manage pension fund money, have been net buyers of domestic and foreign equities in Q2, and they continue to purchase them so far in Q3. The GPIF's Q2 financial results clearly show that the net buying came from smaller public pension funds and private pension funds, not from the GPIF."

"Thus, we still think the expected announcement of the GPIF’s new basic portfolio, likely in September, will generate more portfolio flows from domestic bonds to risky assets. We estimate JPY selling by the GPIF to reach JPY11trn ($106bn), and total JPY selling by public pension funds to be JPY16trn ($148bn), over the next 18 months or so. The full-scale GPIF portfolio shift has not started yet, and we expect the introduction of the new basic portfolio to accelerate JPY weakness."

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