Bank of America Global Research examines the potential implications of portfolio rebalancing by Japan's public pension funds.

"We do not take a view on whether such rebalancing will occur, nor on its scale or direction. However, given higher JPY yields, the yen's decline to date, and recent remarks by Minister Katayama, markets have begun to contemplate the possibility of a shift from foreign assets into domestic assets, particularly in the fixed income space," BofA notes.

"Should such a rebalancing occur, additional demand from public pension funds would place downward pressure on JGB yields, especially in the 10-20yr sector. In FX markets, the impact would be yen-positive for several months, especially against EUR in case of a shift from foreign bonds to domestic bonds. Lower foreign asset holdings would reduce the absolute size of future rebalancing flows in the future, marginally weakening their volatility-suppressing effect on FX markets," BofA adds.