TOKYO (Reuters) - Japan's government is set to urge the nation's public pension funds - a pool of over $2 trillion - to increase their investment in equities and overseas assets as part of a growth strategy being readied by Prime Minister Shinzo Abe, according to people with knowledge of the policy shift.
The steps, which could be announced as soon as Wednesday, represent the first time the Abe administration has looked to mobilize Japan's massive pool of savings to support a growth agenda that aims to spur more consumer spending and corporate investment by pushing the economy toward 2 percent inflation.
It also suggests a new element of risk to the policies known as Abenomics since it would shift funding from the government to the private sector at the risk of driving interest rates higher.
Specifically, the government will set up a panel in July to consider the investment strategies of public funds, which, like other Japanese institutional investors, have relied heavily on investment in Japanese government bonds in recent years.
The panel review will be included as part of a package of steps intended to boost growth set to be announced on Wednesday, according to the people with knowledge of the preparations who asked not to be named because an announcement has not been made.
The panel will look to reach a conclusion as soon as this autumn on strategy and will urge implementation of the new investment guidelines by public funds no later than April 2015, according to the sources.
As part of its deliberations, the panel will consider steps to allow the public funds to invest in alternative investments, including infrastructure financing both in Japan and abroad, the sources said.
The more aggressive investment strategy would apply to the Government Pension Investment Fund, known as GPIF, and about 100 other semi-governmental funds and public funds such as Federation of National Public Service Personnel Mutual Aid Associations, known as KKR.
In recent years, Japanese public funds led by GPIF have followed a conservative strategy that has meant a large allocation of funds to the Japanese government bond market and made them a near-captive source of financing for government spending.
GPIF, for instance, manages a portfolio that includes a mid-point target of a 67-percent allocation for domestic bonds, 11 percent for domestic stocks, 9 percent for foreign stocks and 8 percent for foreign bonds.
Abe has unleashed fiscal and monetary stimulus to boost growth in the short-term. But at the same time, officials have taken steps to reassure investors that Japan will tackle a public debt that is the biggest in the developed world at more than twice the size of the nation's annual economic output.
A government advisory panel warned last month that there was "no guarantee" that domestic investors would keep financing the nation's massive public debt, saying such a move could drive interest rates higher and crimp long-term growth prospects.
Reuters reported last week that GPIF has already been considering change to its portfolio strategy that could allow its investment in domestic stocks to grow with a rallying market. The fund manages the national pension and pension insurance for the private sector.
The Reuters report sent both the dollar higher against the yen and Nikkei futures higher as investors reacted to the prospect that the world's largest public pension fund could increase its exposure to assets other than domestic bonds.
The new government panel will review the investment strategies of public funds more generally, including steps to diversify portfolios and to establish a structure to improve risk management.
Japan's Health Ministry currently supervises the investment strategies of public pension funds.
GPIF's investment model went unchanged through the global financial crisis of 2008 and served the fund well through the years of slow growth in Japan since.
But more recently, the public pension's allocations have been bumping up against the established limits under its conservative portfolio.
By end-December, the public fund was about 60 percent invested in domestic bonds, approaching the minimum 59 percent limit. It had about 13 percent in foreign equities, close to its allocation ceiling of 14 percent.
The main idea under consideration would be for GPIF to change the way it evaluates the potential risk and return on assets to allow it more flexibility, sources have said.
Although Tokyo markets have turned volatile, stocks have rallied since Abe began pushing his policies ahead of his December election victory. At the same time, the yield on the 10-year Japanese government bond has risen to near 1 percent, ending a rally in the government debt market that began in 2006.
More recently, stocks have fallen back from their highs and yields have retreated on the benchmark 10-year bond.
The Nikkei fell 3.7 percent to a six-week low on Monday and the 10-year yield slipped to 0.805 percent.
Reporting By Taro Fuse and Noriyuki Hirata; Additional reporting by Chikafumi Hodo; Editing by Tim Dobbyn