Japan is preparing to allow the Government Pension Investment Fund (GPIF) to put more money outside regular stock and bond markets, Reuters and the Nikkei reported on Sunday.
GPIF, the world’s largest pension fund, managed about $1.8 trillion and held just 1.7% of its portfolio in alternative investments in March. Officials want this share to gradually rise to a ceiling of 5%.
This recommendation will be incorporated into the government’s next report regarding State Investment Fund policy. Officials believe in the necessity of diversifying investment to reduce risks and increase profitability. Private equity, private credit, real estate, infrastructure and related investments are classified under the category of alternative investments.
Large pension funds and institutional investors have incorporated more of these elements to obtain greater returns and diversify risk. In the case of the Public Investment Fund, increasing the investment percentage from 1.7% to 5% means that billions of dollars will be invested there.
Japan is directing more pension funds into private and domestic assets
Finance Minister Satsuki Katayama said on Friday that the GPIF and other government pension funds should invest more within Japan. Her comments pushed the yen higher and supported Japanese government bonds. Traders began to consider the possibility of state-sponsored funds pumping more money into domestic markets rather than keeping their existing portfolio split between domestic and foreign positions.
Given the large size of the GPIF, any significant change will have a direct impact on demand in each market. International investors follow the actions of this fund, because it may affect investments, but it will not eliminate the 5% limit.
The pension proposal comes at a time when the Japanese economy is expanding more quickly than expected. GDP grew at an annual rate of 2.1% in the first quarter of 2026 due to higher consumer spending and strong exports. Economists polled by Reuters expected an increase of 1.7%, compared to 1.3% in the previous quarter.
Government figures released on Tuesday showed that production rose by 0.5% compared to the previous quarter. This exceeded expectations of 0.4% and improved on the 0.3% expansion recorded at the end of 2025. Compared to the previous year, GDP grew by 0.6%. The numbers do not include the full economic damage resulting from the Iran war, which began in late February.
The Bank of Japan is raising interest rates as Japan struggles with persistent inflation
The Bank of Japan expects weaker growth and much higher inflation during fiscal 2026. It cut growth forecasts to 0.5% from 1% and raised core inflation estimates to 2.8% from 1.9%.
“Rising crude oil prices are expected to lead to higher prices, especially energy and commodity prices, as moves to pass wage increases through to selling prices continue,” the Bank of Japan said. Rising oil costs are driving up energy and product prices while companies continue to charge customers more to cover rising wages.
The government is studying a new formulation of monetary policy in its next economic plan. Officials presented a draft to ruling coalition lawmakers on Tuesday. Cabinet approval is expected later this month, followed by the final version. This will be the first chart released since Takaishi Sanae became prime minister.
Bond yields have risen to their highest levels in decades, as investors worry the government may be crossing into central bank territory. Japanese law protects the Bank of Japan from political interference, but also requires coordination with the government’s economic program.
The Takaishi government and advisers who support deflationary policies have cited the above-mentioned regulation to warn the Bank of Japan to exercise caution when raising interest rates. The Bank of Japan responded by saying that interest rates remain low despite the rising pressure on inflation.
Consumer price growth has remained near the Bank of Japan’s 2% target for four years. The weak yen has led to higher import bills, and steady wage increases have kept pressure on domestic prices. The Bank of Japan has raised interest rates twice since Takaishi took office. In June, he raised the key interest rate to 1%, the highest level in 31 years.
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