TV Tokyo reported on Tuesday that the Japanese government will add a footnote to its economic plan, referring to a legal clause that mandates protecting the central bank's independence in setting monetary policy. TV Tokyo added that the government, in the final version of the plan, will ask the Bank of Japan to conduct monetary policy appropriately to 'achieve stable price increases,' thereby affirming that the government does not intend to intervene in monetary policy.

An earlier draft of the government's economic plan had triggered a sell-off in the yen and bonds, as it gave markets the impression that Prime Minister Sanae Takaichi's government, with its accommodative stance, would pressure the central bank to delay interest rate hikes. The minister in charge of the plan later had to acknowledge that the government would revise the wording to soothe market concerns. The cabinet is expected to approve the final version of the plan, the first drafted by the Takaichi administration, next week.

Pension Funds

In a separate context, Japanese policymakers on Tuesday indicated the possibility of changes to the asset allocation of the country's giant government pension funds, although they gave no indications on the timing or scale of any change. Finance Minister Satsuki Katayama said Japan may consider adjusting the funds' asset allocation if the investment environment changes sharply.

Katayama added in a press conference: 'The change in environment will include increased attractiveness of Japanese assets, as the government strongly pushes its growth strategy.' She also clarified that details of any change should be discussed with the Ministry of Health, Labour and Welfare, which oversees the government pension funds.

Health, Labour and Welfare Minister Kenichiro Ueno stated in a separate press conference that the ministry would study revising the asset allocation of the Government Pension Investment Fund (GPIF) if necessary, but he downplayed the likelihood of any near-term changes.

Ueno said the investment environment 'has not deviated significantly from what is assumed in the basic portfolio.' He added that the GPIF will seek to support economic growth 'by steadily increasing investments in domestic projects, including Japanese private investment.'

These remarks eased market speculation about an imminent restructuring of the GPIF's portfolio, the world's largest pension fund, which managed assets of 293.6 trillion yen ($1.81 trillion) at the end of March. Any major shift in its strategy could have implications for global markets.

The yen and Japanese government bonds rose significantly after Katayama's comment on Friday that the government would seek ways to encourage pension funds, including the GPIF, to significantly increase their investments in Japanese financial assets.

Tokyo and Washington in Close Dialogue

Under its current management plan, the GPIF allocates 25 percent each to domestic and foreign bonds, and domestic and foreign equities. The fund allows a deviation margin of 6 percentage points around the target ratio for domestic bonds.

Sources told Reuters on Monday that Japan does not intend to change the target ratios for government pension fund asset allocation, but may operate within the currently permitted ranges to direct more investments toward domestic assets.

It is noted that the GPIF is obligated to invest exclusively for the benefit of pension beneficiaries and may not use its assets to achieve government policy goals. Japan and the United States are in close dialogue nonetheless.

Some analysts noted that Katayama's comments last week opened the door for the fund to increase its holdings of Japanese government bonds, a move that could help curb rising yields and ease pressure on government borrowing costs.

Analysts also noted that a large-scale repatriation of GPIF assets from abroad could support the yen, which remains near multi-decade lows, partly because interest rates in Japan are still much lower than those in other major economies.

In a joint statement signed last September, the U.S. and Japanese finance ministers agreed that any foreign investment by government investment vehicles, such as pension funds, should be for purposes of 'risk-adjusted return and diversification, not targeting exchange rates for competitive purposes.'

When asked whether her recent remarks on the GPIF were consistent with the joint statement agreement, Katayama said: 'There is absolutely no change to what was stated in the statement. As always, Japan and the United States are in very close communication.'