Organizations managing public pension funds in Japan are keeping a smaller share of their assets in Japanese bonds, steering clear of buying in a trend that could add to the upward pressure on yields.

The Federation of National Public Service Personnel Mutual Aid Associations had 19% of its holdings in domestic bonds at the end of 2025, well below its standard allocation of 25%. The organization has around 12 trillion yen ($76.8 billion) in assets under management.

Similar, albeit smaller, declines have been seen at two other major public pension fund managers for personnel at local governments and private schools. The three organizations had a combined 60 trillion yen in assets under management at the end of 2025.

Normally, when market fluctuations cause the share of certain asset classes in a portfolio to deviate from the set weightings, pension funds sell those that have risen in value while buying those that have fallen. The normalization of monetary policy and worries about fiscal expansion have driven up long-term bond yields, reducing their value relative to the rest of the funds’ portfolios.

But the public service federation, while not actively selling bonds, is also not rebalancing to account for this shift or for rising stock prices.

“It’s difficult to buy domestic bonds when yields are going up,” a representative said.

Meanwhile, equity prices have risen markedly in a rally driven partly by expectations for artificial intelligence. The federation logged a 6.6% return for the October-December quarter, compared with an estimated 5.8% if it had kept stocks and bonds at its set allocations of 25% each.

The tendency of public pension funds to buy stocks or bonds automatically when prices fall has helped to calm market turmoil. If the trend of holding off on domestic bond purchases widens further, the market could be left with fewer buyers, making yields more prone to rise.

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