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Asset Management / Treasury & Capital Markets
Japan DB pension funds eye domestic bonds
With higher interest rates, allocation increase expected to manage risk, hedge costs
The Asset   9 Aug 2024

The asset allocation of Japan's defined benefit ( DB ) pension funds to domestic bonds has increased albeit by a small percentage point for the first time in 14 years as the Bank of Japan ( BoJ ) transitions to a positive interest rate environment, according to a recent survey.

This development marks the first time that domestic bond ratios have seen a year-on-year rise since 2010, the year this question was first included in J.P. Morgan Asset Management ( Japan )’s survey of approximately 80 DB pensions in Japan. The survey was conducted between April 2024 and June 2024, targeting Japanese corporate pension funds.

With the Bank of Japan ( BoJ ) transitioning to a “positive interest rate environment” following the normalization of its monetary policy, the survey notes, the allocation of domestic bonds are expected to increase as a means of risk management, and due to concerns about hedge costs in hedged foreign bonds.

Additionally, investment in Japanese government bonds ( JGB ) is gaining traction among DB pensions. “We continued to see a strong investment appetite,” the survey states, “as some DB pensions either initiated or increased their allocation to alternative assets.”

Changes in DB pension allocation highlighted in the survey are as follows:

Future plans of DB pensions, the survey notes, are as follows:

“We are seeing signs that domestic bond ratios are bottoming out, and more and more DB pensions are considering increasing their allocation to domestic bonds as the positive interest rates environment becomes more recognized,” says Kaguya Komatsu, the asset manager’s head of Japan funds and institutional business. “As domestic interest rates steadily rise, investment in domestic bonds by DB pensions may become more critical in the future.”