By Chikafumi Hodo
TOKYO (Reuters) - Japan's public pension fund, the world's largest with a pool of $1.1 trillion, announced on Friday the most significant shift in its asset allocation since 2006 so it can take on greater risk by shifting into stocks and away from Japanese government bonds.
The steps by the Government Pension Investment Fund (GPIF) come after a draft strategy document this week showed Prime Minister Shinzo Abe was considering a push for public funds to increase returns as part of measures to revive the economy's fortunes. The events confirm reports by Reuters this week.
GPIF said it is increasing its Japanese stocks allocation to 12 percent of its portfolio from 11 percent, while lowering its JGB weighting to 60 percent from 67 percent. However, the change largely reflects adjustments already made in the portfolio, suggesting limited impact on markets.
The fund's latest publicly available allocations show that as of December 60.1 percent of the 111.9 trillion yen under management was already in JGBs. It had already allocated 12.9 percent to domestic stocks.
"GPIF is ratifying the current situation taking into account the moves in the market. GPIF would avoid readjusting its portfolio by doing this," said Eiji Dohke, director and chief JGB strategist at Citigroup Global Markets Japan.
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GPIF said it would increase its weighting in foreign stocks to 12 percent from 9 percent and lift its allocation of foreign bonds to 11 percent from 8 percent.
The new allocations were released after the close of Tokyo share trading but expectations of the announcement had pushed stocks up from the day's low. The stock benchmark Nikkei average closed down 0.2 percent on the day.
BONDS REMAIN STAPLE
Masahiro Ooe, a councillor at GPIF, told a news conference that a review of the fund's long-term risk and return profile had concluded the pension could take more risk.
The fund said it will not comment on whether it will trade actively in the market.
Dohke said the changes could still depress JGBs as hopes for GPIF inflows into JGBs could now have receded. Some in the market had thought the fund would have to sell domestic shares and foreign assets to maintain its investment limits and they had speculated some of the cash proceeds would then go into JGBS.
"But this is not likely to happen after today's change, Dohke said.
Government bonds will remain the fund's staple investment however, unlike some other large public funds globally which adopt a much greater weighting in stocks.
Canada's Pension Plan Investment Board, with $183 billion in assets, and Norway's $686 billion pool of government savings from petroleum revenue, known as the Government Pension Fund Global, both allocate most of their money to equities.
GPIF hit its own internal return targets in recent years, or a total return averaging 2.4 percent a year. By comparison, Norway's Government Pension Fund Global, returned almost 6 percent a year over the past decade.
ABENOMICS
A growth strategy outlined this week by Abe marked the first time he had sought to mobilise public savings to support an aggressive growth agenda aimed at defeating years of deflation and sluggish economic growth. GPIF and other Japanese public funds have a collective pool of $2 trillion in assets.
Abe has already pushed through $100 billion in government spending and shaken up monetary policy by prodding the Bank of Japan into a $1.4 trillion stimulus effort to achieve 2 percent inflation within two years.
He won a December election as leader of the Liberal Democratic Party and promised "bold" economic policies, which been dubbed 'Abenomics' by the media.
The Nikkei is up 24 percent this year off the back of Abe's policies, although a bout of profit taking has pulled the average back from its highs of the year.
"Recent weakness in the market represents a little bit of a disappointment for Abenomics," said Kenji Shiomura, an analyst at Daiwa Securities.
"But it would be too extreme to say that hopes for Abenomics have faded completely because the biggest impact Abenomics gave the market was monetary easing, and it is still continuing," he said.
The changes by the GPIF were prompted by a report from Japan's Board of Audit, which had been requested by Japan's upper house. The board called last year for the fund to review its targets and allocations. (Writing by Nathan Layne; Editing by Shinichi Saoshiro and Neil Fullick)