* GPIF eyes investments in private equity, infrastructure, real estate
* Public fund's portfolio $1.38 trln, bigger than Australian GDP
* July-Sept investment performance improved from April-June
(Updates with quotes, details)
By Chikafumi Hodo and Junko Fujita
TOKYO, Oct 4 (Reuters) - The head of Japan's Government Pension Investment Fund (GPIF), the world's biggest public pension fund, said it may venture into alternative assets, such as infrastructure and private equity funds, as an ageing population puts more stress on the pension system.
Looking around for new and better investment returns is vital for the fund as for the past three years it has been paying out more in benefits than it receives in contributions to the national pension system.
GPIF Chairman Takahiro Mitani told Reuters in April that he was concerned that fewer people were paying into public pension plans at a time when more people were retiring from work.
Japan's population is expected to fall by 30 percent to below 90 million by 2060, when the proportion of those aged 65 or older will have almost doubled from 2010, a government agency survey showed in January. [ID:nL4E8CU4GZ]
"We are considering expanding our investment targets to alternatives, which include infrastructure, real estate and private equity," Mitani said in an interview on Thursday.
"The GPIF eventually will have to diversify its investment targets to alternative investments. I don’t know if that's going to happen when I'm in this post but there's a question whether we should stick to these four asset classes forever," he said.
The fund, which has assets of 108.2 trillion yen ($1.38 trillion) - worth more than the Australian economy, the world's 13th largest - invests in four conventional asset classes, allocating funds in line with its model portfolio. This gives a weighting of 11 percent to Japanese stocks and 67 percent to domestic bonds, with 9 percent to foreign stocks and 8 percent to foreign bonds. It also has 5 percent invested in short-term assets.
Mitani said the GPIF, which began investing in emerging markets this year, was selecting advisers for its future alternative investment strategies aimed at diversifying and generating more returns for the long-term. [ID:nL3E8I20DZ]
GRAPHIC: GPIF by numbers r.reuters.com/vuw92t
Mitani has said Japan's debt burden, by far the largest among developed nations at double the size of its $5 trillion economy, could reach a critical point in 5-10 years. On Thursday, he said those concerns over a bulging public debt may have eased after the government secured political support to raise the country's sales tax. [ID:nL4E8J98H6]
"I feel a crucial point has been delayed slightly as the consumption tax law was passed," he said.
International organisations such as the International Monetary Fund and the Organisation for Economic Co-operation and Development have urged Japan to reduce its debt burden as a priority.
Japan is able to cover about 95 percent of its finance needs from domestic savers. The fear is that in the next decade its swelling ranks of retirees will begin to run down their savings to the point where Tokyo needs to start borrowing from overseas lenders, who will demand a much bigger risk premium.
Mitani said it would take an extremely long time before Japan can tighten its monetary policy under current economic conditions, both at home and abroad.
The fund is aware of the risks involved when Japanese government bonds (JGB) yields increase, which could ravage its domestic bond portfolio, though in the long-run higher bond yields would be positive for its investments, Mitani said.
Under its current model portfolio - set by the government and reviewed every five years - the GPIF has to allocate two thirds of its portfolio to JGBs. Yields on the key 10-year bond JP10YTN=JBTC currently languish below 0.8 percent.
Mitani said the amount of cash required for pension payouts this financial year could fall by about 2.5 trillion yen ($31.8 billion) if the government can issue bonds designed to fund pension payouts. The GPIF initially expected it would need 8.87 trillion yen for pension payouts in the year to next March. [ID:nL3E8F3130]
The fund's quarterly investment performance may have improved in July-September, from the previous quarter, he noted, as world stock markets have picked up. The fund saw the value of its portfolio slump by $26 billion in April-June - its first fall in three quarters - as the yen strengthened JPY= and equity markets fell. [ID:nL4E8JV31V] The fund has not set a release date for its July-September results.
Mitani said the GPIF may invest in private equity firms, though he is concerned there aren't enough successful private equity deals in Japan. "I have not heard so many successful stories about Japan’s private equity investments. I don’t know why that is. It seems there are many successful investments made by private equity overseas."
He said the GPIF would not allocate money to hedge funds as investing in these doesn't fit with the fund's requirements for regular and a high level of disclosure.
($1 = 78.5300 Japanese yen)
(Additional reporting by Takaya Yamaguchi; Editing by Kim Coghill and Ian Geoghegan)
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