Key Highlights

• Japanese Finance Minister Katayama calls on GPIF to increase domestic investments.
• U.S.-Iranian technical talks to continue despite recent escalation.
• Andy Burnham’s rise to U.K. premiership now a formality.

Chart of the Day

GPIF asset allocation as of end-fiscal year 2025; total size ¥293.6tn

^{Source: BNY, GPIF}

Japanese Finance Minister Satsuki Katayama’s comments on greater GPIF investments in domestic financial assets took markets by surprise. The premise of the comments is clear, as greater home bias by de facto global sovereign entities to support industrial and growth policy has become the norm. A gradual slowing or even cessation of Asian current account surplus allocations to higher-yielding global assets is imperative to realize currency valuations. Global reserve growth driven by currency intervention may have slowed, but the true flows holding down these undervalued currencies are by long-term funds. Burdened by unfavorable demographics and low domestic yields, the push overseas for higher yields and returns has become reflexive, and changing this will take material mandate adjustments.

By design, the GPIF’s asset allocation uses a 50/50 domestic/foreign investments benchmark, while within each geographical region, there is a further equal split between bonds and equities. We do not see de jure benchmark changes soon, but GPIF’s benchmarks have very large deviation limits, up to 9% by geography and 6% by asset class. This means that, in extremis, Japanese assets could move to 59% from the current level of 51%. That 8 percentage point swing could require repatriation of adjustment or hedging (JPY hedged foreign bonds are classified as domestic bonds) of ¥23tn in assets, equivalent to around $146bn assuming USDJPY = 160. This is sizeable on paper but only twice the level of the fairly ineffective intervention in May.

What's Changed?

The status quo is tenable. That is the market’s verdict heading into the weekend. What underpins that status quo is open to debate, but the Strait of Hormuz is diminishing in importance. The IEA has announced that the UAE boosted crude oil production to a record 4.1 million barrels/day in June. More importantly, the oil is moving. Reports suggest UAE tankers, like many others, are “going dark” to avoid detection and limit the impact of any resumption in hostilities.

Demand is also working in favor of lower energy prices. China will not set a jobs target in its five-year plan for the first time in the modern era, recognizing not only the impact of AI but also demographic realities. The drag on energy prices from weaker trend growth in China and broader Asia remains unavoidable.

Interest in AI exposure remains strong. Enthusiasm for SK Hynix’s record ADR sale suggests global investors are continuing to add to their exposure to the AI complex. The proceeds will be invested in South Korea, but markets should not expect a major boost for Asian currencies. Even if the entire allocation were to be repatriated, it equates to less than one month’s trade surplus for South Korea.

The bigger structural story remains Japan. The finance minister’s push for the Government Pension Investment Fund to increase domestic allocations is significant, but the GPIF alone is unlikely to help JPY or its APAC peers realize fair value. A meaningful shift would require official institutions to lead a broader rise in home bias across North Asia’s savings base. Japanese household financial assets are around ten times larger than the GPIF’s, according to Japan’s flow of funds data, meaning that repatriation of their overseas assets would be a game-changer. The APAC FX status quo is untenable, but any adjustment would deliver an equivalent shock to deficit countries’ financial accounts.

The calendar is quiet for now. There are no major U.S. data releases today. Earnings and inflation next week will provide the next tests of the current equilibrium.

What You Need to Know

Japanese Finance Minister Satsuki Katayama has said the government wants households and pension funds, including the Government Pension Investment Fund, to increase investment in domestic Japanese financial assets. Her comments shocked markets and briefly lifted the yen and pushed bond yields lower. The remarks came at a regular press briefing and were presented as support for Japan economic growth, strategic investment and a stronger flow of savings into local assets. Market participants saw the move as potentially supportive for equities and the currency, though it remains unclear whether any allocation changes will follow. Katayama also stressed that monetary policy should remain the BoJ’s responsibility, helping to ease concerns about direct government pressure on the central bank. Nikkei +1.2% to 68558, USDJPY -0.376% to 161.77, 10y JGB -10.7bp to 2.769%.

U.S. officials have said technical talks with Iran are still continuing despite two days of renewed clashes that have threatened an already-fragile ceasefire. Washington reiterated that it remains committed to finding a solution, even as the truce came under pressure from fresh U.S. strikes on Iranian targets and Iranian retaliation against U.S. bases in the region. Trump suggested the ceasefire was “over” but said he would not block negotiations. The interim peace deal had opened a 60-day window for broader talks, but there has been limited progress on key issues including shipping tolls in the Strait of Hormuz, frozen Iranian assets and Tehran’s nuclear ambitions. The flareup, along with the U.S. Treasury’s revocation of an oil sales waiver, has heightened tensions and slowed transit through the strait. Brent -0.826% to 75.67, WTI -0.791% to 71.51, Omani crude -2.737% to 69.67, Dubai crude -1.771% to 69.236.

Andy Burnham is set to become the next Labour leader and U.K. prime minister after 322 Labour MPs backed his nomination, leaving him one short of the threshold that would make a rival challenge impossible. He remains the only declared candidate, and if no new contender emerges he is expected to be confirmed next week and take office on July 20. Burnham said the backing reflected a shared belief that Britain needs a new approach, promising to shift power away from Westminster and deliver growth across the country. Some within Labour want him to set out more policy detail, including on local control, water and energy, defense spending and Gaza. FTSE 100 +0.31% to 10505, GBPUSD +0.127% to 1.3425, 10y gilt -1.7bp to 4.88%.

China’s five-year employment plan notably omits a numerical target for new urban job creation in 2026-30, the first such absence in at least three decades. This marks a clear shift in Beijing’s labor market messaging. Instead, the Ministry of Human Resources and Social Security said new urban jobs will be kept at a considerable scale, with annual goals adjusted flexibly according to conditions each year. The ministry pointed to mounting pressure on jobs and household incomes, weak livelihood support, industrial change, demographic shifts and AI as an emerging force reshaping employment. The change underscores a more uncertain jobs outlook, as China tries to balance technological ambition against the risks of labor displacement and social stability pressures. CSI 300 -1.96% to 4781, USDCNY -0.18% to 6.78, 10y CGB -0.2bp to 1.732%.

South Korea’s top currency official said the won remains misaligned with economic fundamentals and that authorities have room to stabilize the market if needed. Deputy Finance Minister Moon Ji-sung said supply and demand conditions in the local FX market should improve in the second half of 2026, as exporters’ dollar holdings are expected to flow back through FX forwards. He argued that South Korea’s strong export base and corporate dollar reserves do not justify the won’s current discount. The comments helped the won recover after earlier weakness, following a recent drop to its weakest level since March 2009 amid heavy foreign equity selling and a strong dollar. The statement came after South Korea launched 24-hour onshore trading for the dollar-won spot market this week. KOSPI +2.52% to 7476, USDKRW -0.292% to 1503.3, 10y KTB +1.2bp to 4.262%.

What we’re watching

Canada June net change in employment is forecast at 10k vs. 87.8k.

Canada June unemployment rate is forecast to stay unchanged at 6.6%. The participation rate is forecast to be unchanged at 65.0%.

Canada June hourly wage rate for permanent employees is forecast at 3.6% vs. 3.2% y/y.

Canada May building permits are forecast at 1.0% vs. -7.6% m/m.

What iFlow is Showing Us

Mood: iFlow Mood deteriorated further to -0.098, with a stronger flight-to-safety bid into core sovereign bonds alongside persistent global equity outflows.

FX: Safe haven demand dominated, with broad inflows into USD, JPY and CNY against outflows from GBP, EUR and CAD. COP remained the most overheld and profitable currency in the iFlow universe.

FI: Demand was concentrated in Eurozone government bonds and U.K. gilts, while flows across EMEA, APAC and LatAm were mixed and generally moderate.

Equities: Global equity flows were mixed. Colombia and Mexico saw the largest outflows, while India attracted the strongest inflows, followed by Japan and Chile.

Quotes of the Day

“It’s sure gonna be better than I thought it would be.” – Warren Buffett, on investing in Japan

“The yen is the school chump who is always good for a tease.” – Jonathan Ruffer

Economic Details

German inflation came in at 2.3% y/y in June, down from 2.6% in May and 2.9% in April, as price pressures continued to ease. On a m/m basis, consumer prices fell 0.3%. Destatis said energy remained a key driver, but its rate of increase slowed markedly, with energy prices up 3.4% y/y after much stronger gains in prior months. Food prices rose only 0.4%, while core inflation excluding food and energy stood at 2.5%. Services inflation remained elevated at 3.1%, led by social services, vehicle maintenance, hairdressing, travel packages and hospitality. DAX +0.12% to 25149, EURUSD +0.079% to 1.1439, 10y Bund -1.8bp to 3.066%.

French CPI fell 0.3% m/m and rose 1.8% y/y in June, with inflation easing from 2.4% in May. The m/m decline was driven mainly by a sharp drop in energy prices, especially petroleum products, while food and manufactured goods also weakened. Services prices increased seasonally, partly offsetting the fall. Core inflation slowed to 1.0% from 1.5%, reflecting softer air transport, clothing, insurance and telecoms prices. The HICP also decreased by 0.3% m/m and rose 2.0% y/y, with the gap versus CPI largely due to weighting differences. CAC 40 +0.23% to 8346, EURUSD +0.079% to 1.1439, 10y OAT -1.4bp to 3.841%.

Italian industrial production fell 0.3% m/m in May (seasonally adjusted), while the March-May average rose 0.9% versus the previous three months. On a calendar-adjusted annual basis, output increased by 1.1%, helped by a 5.0% rise in capital goods, a 1.9% gain in energy and a 0.8% increase in intermediate goods, while consumer goods declined by 3.2%. Among sectors, the strongest y/y gains were in transport equipment, pharmaceuticals and chemicals. The sharpest declines were recorded in textiles, clothing, leather and accessories, other manufacturing and repair, and electrical and household appliances. FTSE MIB +0.5% to 52644, EURUSD +0.079% to 1.1439, 10y BTP -2.4bp to 3.814%.

Norway’s Consumer Price Index showed inflation continuing to ease in June. CPI was up 2.7% y/y, or 0.4 percentage points below the May reading, in a third straight monthly slowdown. On a m/m basis, CPI fell 0.2% from May to June. The main drivers of the softer y/y rate were food and electronics, while air passenger transport also helped restrain inflation despite a m/m rise. Electronics prices fell sharply (-8.5%) from May to June, a larger decline than a year earlier, and food prices rose only 0.3% m/m versus 1.4% last year. The figures were released with a caution due to temporary IT issues at Statistics Norway. OSE -0.04% to 1940, EURNOK +0.465% to 11.1668, 10y NGB -5.8bp to 4.336%.

Czech consumer prices fell 0.3% m/m and rose 1.5% y/y in June, with the annual pace easing from May as fuel costs and weaker food prices offset gains in services and housing. Lower transport prices, especially for fuels and lubricants, drove the m/m drop, while food prices fell because of eggs, butter, milk, oils and vegetables. On an y/y basis, transport remained the biggest contributor, but inflation also reflected higher prices for alcohol, tobacco, housing, rentals, repairs, water, sewage and catering services. Electricity and gas continued to fall. Goods prices were down 0.4% y/y, while services rose 4.5%. The HICP fell 0.5% m/m and rose 1.1% y/y. Prague SE -0.04% to 2607, EURCZK -0.013% to 24.251, 10y CZGB -1.3bp to 4.684%.

Türkiye’s industrial production was unchanged y/y in May, with the total index holding flat. By subsector, mining and quarrying fell 5.0%, manufacturing rose 0.3% and electricity, gas, steam and air conditioning supply increased by 1.0%. On a m/m basis, industrial production declined by 2.9%, reflecting a 3.3% drop in manufacturing and a 0.9% fall in utilities, while mining and quarrying rose 1.5%. The release suggests weak momentum in industry despite slight support from manufacturing and utilities. BI 100 +1% to 14247, USDTRY +0.161% to 46.9852, 10y TGB -27bp to 33.58%.

Japan’s Corporate Goods Price Index rose 0.4% m/m in June, extending from 1.1% in May, with the y/y pace accelerating from 6.6% to 7.1% – the fastest since March 2023. Price gains were led by petroleum and coal products, electric power, gas and water, and plastic products, while agriculture, forestry and fishery products weighed on the index. The export price index fell 0.4% m/m in contract currency terms, reversing May’s 0.6% rise, as declines in other primary products, metals and chemicals outweighed gains in electric and electronic products. The import price index rose 0.1% m/m after -0.6% in May, supported by electric and electronic products and metals, though petroleum, coal and natural gas decreased. On a yen basis, import prices rose 1.3% m/m and 29.7% y/y. Nikkei +1.2% to 68558, USDJPY -0.376% to 161.77, 10y JGB -10.7bp to 2.769%.