By Chikafumi Hodo and Takaya Yamaguchi
TOKYO (Reuters) - Prime Minister Shinzo Abe is moving to shake up oversight of the world's largest pension fund, expanding the board and giving it new power to steer a shift out of Japanese government bonds and into higher-yielding assets, according to two people with direct knowledge of the matter.
Officials are considering a proposal to add two or three dedicated professional advisors to the committee that oversees investment at the $1.26 trillion Government Pension Investment Fund (GPIF). They would play a key role in reforming a fund that's bigger than the economic output of Mexico with the power to influence markets as Abe presses policies to spur growth.
The beefed-up GPIF committee could be given new, broader powers that would make it the final arbiter for how the Japanese pension fund invests its money, according to the people, who asked not to be named because the policy measures remain under discussion.
The existing investment committee comprises academics and economists, with a representative from Japan's trade union federation and one from the main business lobby. Its current role is restricted to advising the fund's president.
The proposed reforms would help shift GPIF towards riskier investments like stocks and away from low-yielding Japanese government bonds. Supporters of the reform say targeting higher returns would benefit future pension recipients in Japan's ageing population and drive economic growth.
A spokesman for GPIF said the fund would not comment on matters under consideration as a matter of policy.
Earlier this month, Abe told a dinner hosted by the City of London that reform of GPIF was under way and that the fund was "making improvements".
Last June, GPIF lowered its allocation target for domestic bonds and raised its target for stocks as part of a bid to achieve higher returns. In March, the fund was given a target of hitting a return of 1.7 percentage points over wage increases.
Taken together, GPIF has already seen more changes in the past year under Abe than it has since its establishment as a public fund in 2001.
As part of those changes, a person with knowledge of the process said GPIF's investment committee has formed a four-member working group headed by Sadayuki Horie, a senior researcher at Nomura Research Institute, that has been tasked with a review of its allocation targets over the next two to three months. Horie declined to comment.
As it reforms GPIF, Abe's government is betting that it can give up a back-pocket means of financing Japan's government debt, now over 200 percent of GDP and the largest in the industrialized world.
GPIF currently holds 60 percent of its assets in Japanese government bonds, but the Bank of Japan now buys up most new debt issued by Japan's government as part of an aggressive monetary easing.
"Debate is already proceeding and we've indicated a direction for GPIF in moving out of JGBs and into risk assets like stocks, REITs and infrastructure funds," Japan Vice Minister Yasutoshi Nishimura told Reuters.
The target for reformers has been to make GPIF more like overseas public pensions, like those run by Norway, Canada and the state of California. Those funds all hold more than half of their assets in equities.
At the same time, they are staffed by hundreds of professionals to vet fund managers and monitor performance. The Canada Pension Plan Investment board employs over 900 staff. Japan's GPIF, by contrast, has only about 80 staff.
Fidelity Investments, the private U.S. mutual fund giant, has about $1.9 trillion under management as of April and employs over 40,000 people in North America.
Masahiko Shibayama, a lawmaker in Abe's Liberal Democratic Party who heads the group preparing proposed financial reforms, told Reuters in a recent interview that GPIF's investment committee needed more authority.
"We think it's necessary to reform governance of GPIF," Shibayama said. "I think there needs to be an official process so that the knowledge of specialists can be reflected in decision-making. It's very simple."
Shibayama declined to comment on the specific proposals his panel is preparing, part of a June announcement of Abe's "third arrow" of reforms, referring to the third plank of policies designed to revive the world's third-biggest economy. Among measures expected to be announced are a recommendation for a cut in the corporate income tax level.
Last month, Japan's health ministry, which has a supervisory role for the fund, appointed eight members to the GPIF investment committee. Three of the eight also previously served on a separate Abe-appointed economic advisory panel that recommended increasing the role of financial professionals at GPIF and reducing its reliance on Japanese government bonds.
The proposed reforms add a new note of uncertainty about the tenure of the fund's president, Takahiro Mitani, a former Bank of Japan board member with one year remaining of a five-year term. Mitani declined a request for an interview.
Although Mitani is credited with helping to steer GPIF through its still-developing reform, his tenure is also seen as symptomatic of the passive and bureaucratic approach to fund management that the Abe government is set to change.
One obstacle to hiring full-time fund managers, for instance, has been GPIF's salary structure, which is in line with government ministries. Mitani, who made the equivalent of $192,000 for the year ended March 2012, has been the highest paid fund employee.
GPIF is in the process of selecting a consultant to review its salary and bonus scheme for new and existing staff, a spokesman said.
(Reporting by Chikafumi Hodo and Takaya Yamaguchi; Editing by Kevin Krolicki, Edmund Klamann, Kenneth Maxwell and Miral Fahmy)
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