Japan’s Government Pension Investment Fund boosted its holdings of Treasuries to a three-year high as the dollar’s strength against the yen offset losses on the securities.

GPIF, as the world’s biggest pension fund is known, increased US government bonds and bills to 43.3% of its foreign debt holdings in the 12 months through March from 40.8% previously, according to an analysis by Bloomberg of the latest data released this month. That’s the highest since the allocation reached 47.4% in March 2020.

Resilient demand from the pension giant suggests that elevated yields and a weak yen can support Japanese appetite for US debt, despite currency-hedging costs around the highest in more than two decades. GPIF holds ¥200 trillion ($1.4 trillion) worth of assets — a hoard about as big as Spain’s economy — and what it does has huge ramifications for Japanese portfolio flows, given that many of the nation’s other funds follow its lead.

While signs of easing inflation in the US means that Treasury yields may start to fall sooner than rates in other bond markets, they are likely to remain attractive to Japanese investors, according to Kiyoshi Ishigane, chief fund manager at Mitsubishi UFJ Kokusai Asset Management Co. in Tokyo. “As long as the yen doesn’t strengthen, Japanese investors will benefit both from income and capital gains in Treasuries,” he said.

Rebalancing flows resulting from fluctuations in exchange rates should continue to partly offset both depreciation and appreciation pressures on the yen, strategists at Barclays Plc, including Shinichiro Kadota, wrote in a research note.

To be sure, the yen has rebounded recently and there are plausible scenarios that could extend the rally and affect flows into Treasuries. Signs of long-awaited inflationary pressure in Japan could trigger an earlier-than-expected shift in the Bank of Japan’s loose monetary policy, the Federal Reserve appears to be nearing the peak of its rate-hiking cycle, and global recession risks highlight the yen’s value as a haven.

In the 12 month’s in question though, the dollar jumped 9.2% against Japan’s currency while Treasuries lost 4.5%. GPIF’s holdings of US government bonds and bills increased 8.2% in yen terms to ¥21.6 trillion.

Japanese investors are the biggest foreign holders of Treasuries, with $1.1 trillion of the securities as of April. China was ranked second with $869 billion, followed by the UK and Belgium.

It should also be noted that GPIF’s asset allocation doesn’t directly reflect its market view. The fund outsources investment to managers such as BlackRock Inc. and Sumitomo Mitsui Trust Asset Management Co., with 86% of foreign bonds passively invested to track benchmarks. GPIF’s assets are also equally divided into foreign and local equities as well as bonds.