It was only a matter of time before Japanese Prime Minister Sanae Takaichi was going to be forced to look to alternative funding sources for her ambitious spending plans, given that the government is in a problematic financial situation and the central bank is cutting back purchases of government debt.
As it turns out, these captive sources are the massive Government Pension Investment Fund (GPIF), the world’s biggest pension fund, and the also huge Nippon Individual Savings Account (NISA).
Investors accustomed to years of financial market liberalisation in Japan might not welcome this apparent reversion to more dirigiste state financing. But with the government’s rising social obligations and stepped-up defence spending, there appears to be little alternative.
As the Japan Times reported on June 24, Takaichi’s long-term vision for economic development features massive investments in artificial intelligence and semiconductors as well as other key sectors including defence, space and shipbuilding.
The plan calls for investing more than 370 trillion yen (US$2.3 trillion) in the 14 years through to March 2041, with 101.6 trillion yen earmarked for spending on AI and chips. It envisages a combination of public and private investment with the government contributing nearly one-half.
The government has also released long-term economic and fiscal projections incorporating Takaichi’s growth strategy. In the most optimistic case where the strategy delivers as intended, the debt-to-gross domestic product ratio which is currently close to 250% is expected to decline steadily even as the government contributes 10 trillion yen annually towards her investment plan.
Japanese governments have long been able to run huge fiscal deficits as government bonds were absorbed by the Bank of Japan, the GPIF and other major institutional investors, with relatively little reliance upon foreign investors.
This is changing now as the central bank progressively reduces purchases of Japanese government bonds (JGBs) in order to restore more “normal” bond market activity, and as relatively low yields on the bonds compared with those in the US and elsewhere work against foreign holdings of Japanese government debt.
The GPIF and NISA are among the two obvious alternative sources of finance — if they can be induced to increase their holdings of government securities.
Satsuki Katayama, Japan’s finance minister, said at a press conference on July 10 that she wants to pursue measures to encourage households and pension funds, including the GPIF, to make further investments in domestic financial assets. “We want to promote this with a new package that creates a virtuous cycle of growth and asset formation for the people,” she said, promising to “have a proper consensus within the government and discuss the matter”.
The GPIF held almost 294 trillion yen or $1.8 trillion of assets at the end of its fiscal year ended March 31, 2026. This includes $931 billion in foreign assets including $232 billion in US Treasuries, based on calculations by Reuters.
According to Daiwa Asset Management, the pension fund’s basic portfolio is equally weighted across four asset classes, with approximately half in domestic stocks and bonds. Three main ways to increase domestic investments are being considered: utilising the allowable deviation range, expanding domestic alternative investments, and revising the basic portfolio.
Daiwa says the domestic asset ratio can theoretically be increased to a maximum 61% by utilising the allowable deviation range. This would be equivalent to an additional allocation of approximately 31 trillion yen compared to the end-March figure.
The allowable deviation range is not a mechanism that assumes a permanent domestic bias, however, and the GPIF is supposed to seek optimum returns for pensioners, which may not always come with JGBs.
The issue could become quite political as similar arguments apply to the potential use of NISA funds to cover government financial deficits.
