Analysts at Santander suggest that Japan's Government Pension Investment Fund (GPIF) could sell as much as $62 billion in US Treasuries without needing a formal adjustment to its asset allocation policy. The speculation follows an unusual meeting held by the GPIF management team last month, fueling market conjecture that the $2 trillion investment vehicle is weighing a reduction in foreign bond holdings in favor of a greater share of Japanese domestic debt.

Japan's Health, Labour and Welfare Minister, Kenichiro Ueno, stated on Tuesday that officials are still deliberating whether a review of the asset mix is necessary. However, analysts led by Antonio Villarroya at Santander argue that even prior to any formal review, current policy already grants fund managers ample room to significantly lower overseas bond exposure, with US Treasuries carrying the highest risk of being pared down.

Villarroya and his team wrote in a note to clients that the flexibility within the strategic allocation range allows GPIF to begin trimming foreign bond positions in the coming months, without waiting for a formal strategic asset allocation review. They added that this possibility becomes even more likely if the Bank of Japan successfully reverses the yen's weakness through a series of interest rate hikes.

For decades, Japan's ultra-low interest rates have driven domestic investors to seek returns abroad, establishing the nation as one of the world's largest capital exporters. According to US Treasury data, Japan currently stands as America's biggest overseas creditor, holding roughly $1.1 trillion in US government debt. Yet, this investment rationale is now shifting.

Driven by concerns over inflation and fiscal spending, along with expectations that the Bank of Japan may need to accelerate rate increases, the 10-year Japanese government bond yield touched 3% last week for the first time since 1996. GPIF currently targets a 25% allocation to foreign bonds, with a permitted fluctuation band of plus or minus five percentage points.