It's a question of when, not if, Japan's large institutional investors will reallocate funds from government bonds into riskier assets including domestic equities, said Shogo Fujita, chief Japan bond strategist at Bank of America Merrill Lynch.
This shift would inject fresh momentum into the nation's recently battered stock market.
Japan's government is set to urge the country's $2 trillion worth public pension funds to increase their exposure to equities and overseas assets as part of Prime Minister Shinzo Abe's long-term growth strategy expected to be announced this week, Reuters reported Tuesday.
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"Bottom line they [Government Pension Investment Fund and Yucho] will start to reallocate funds to more risk assets including equities and foreign assets," Fujita told CNBC Asia's "Squawk Box" on Tuesday, referring to the investment arm of Japan's public pension system and the country's postal bank.
Under its current portfolio strategy, the Government Pension Investment Fund (GPIF), which manages the retirement savings of government employees, targets 11 percent allocation for domestic stocks, according to Reuters, with a 6 percent band to increase or decrease equity holdings from the specified target.
The flexibility of the band will likely be increased, Fujita said, adding that Abe could announce this as soon as Wednesday.
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"The GPIF is a quasi-sovereign wealth fund. They [government] can order the pension funds to diversify into risk assets," he said.