Yen rises as Japan encourages pension funds to invest in domestic assets
By Rae Wee
Japan's Pension Fund Strategy and Currency Impact
SINGAPORE, July 10 (Reuters) - The yen bounced on Friday on news that Japan plans to encourage pension funds to increase their holdings of domestic financial assets, a move analysts said could offer greater support to the battered currency than intervention.
Government Initiatives to Boost Domestic Investments
Japanese Finance Minister Satsuki Katayama said the government is pursuing measures that would include the Government Pension Investment Fund (GPIF), one of the largest pension funds in the world, to make "substantially greater investments in Japanese financial assets."
Immediate Market Reaction
The yen jumped in the aftermath and was recently 0.6% higher at 161.44 per dollar.
Analyst Insights on Currency Support
"The pension funds are pretty large in size, so you can imagine if a structural tilt to how they are allocating assets - currently, 50% is allocated to foreign investments in their strategic allocation, and a shift in that would definitely create a lot more inflows for domestic assets ... so that's supportive of the currency and at the same time, also supportive of equities and bonds," said Fabien Yip, a market analyst at IG.
Long-Term Outlook for the Yen
"With the currency situation that we're seeing, with yen at close to 40-year lows against the dollar, and they are also kind of running out of ideas on how to support the currency ... I think trying to change the issue structurally or fundamentally, which is to create more flows into yen-denominated assets, would be supportive of the currency in the longer term."
Broader Market Movements
Yen's Performance Against Other Currencies
The yen strength was broad-based. The euro fell 0.34% to 184.93 yen, while the British pound slid 0.27% to 217.06 yen.
Before Friday's news, the yen had been languishing near 40-year lows, keeping traders on guard for potential intervention by Japanese authorities.
Global Currency and Market Trends
In the broader market, the yen strength in turn pushed the dollar lower; it fell 0.3% against a basket of currencies to 100.61.
Overnight, investors seemed to brush off flaring tensions in the U.S.-Israeli war on Iran as oil fell and stocks rallied, though currencies were mostly rangebound. But the implosion of a ceasefire between the U.S. and Iran has once again cast a cloud over the outlook for energy prices and global inflation.
Geopolitical Risks and Market Sentiment
"The specter of war still hangs over sentiment," said Thierry Wizman, global FX and rates strategist at Macquarie Group.
"The question confronting traders is whether Iran is willing to return to large-scale kinetic war with the U.S. and its allies if necessary to strengthen its claim of control over the Strait of Hormuz."
Other Major Currencies and Central Bank Actions
Dollar and Euro Movements
The dollar was set to end the week little changed, with renewed safe-haven gains offset by receding expectations of a rate increase from the Federal Reserve.
The euro rose 0.25% to $1.1459. Sterling was up 0.3% at $1.3451 and was set to rise more than 0.7% for the week.
Australian and New Zealand Dollar Trends
The Australian dollar edged 0.27% higher to $0.6960, while the New Zealand dollar advanced 0.58% to $0.5789.
The kiwi was headed for a weekly gain of more than 1.4%, after the Reserve Bank of New Zealand (RBNZ) hiked rates this week and signalled further tightening ahead.
RBNZ Rate Hike Outlook
Westpac expects the RBNZ to raise rates by 25 basis points in September and December and forecasts the cash rate to peak at 4% in September 2027.
"The exact timing of the tightening profile is highly uncertain and even the tightening we forecast at the September 2026 meeting should not be regarded as a done deal," said Kelly Eckhold, Westpac's chief economist.
(Reporting by Rae Wee; Editing by Shri Navaratnam and Thomas Derpinghaus)
