TOKYO (Reuters) - Japan's $1.4 trillion Government Pension Investment Fund (GPIF), the world's largest pension fund, warned the country needs to resolve its debt problems, although, for now, it is sticking to its basic investment strategy.
GPIF Chairman Takahiro Mitani said in an interview with Reuters that Japan's bulging public debt -- the largest among developed countries at double the size of its $5 trillion economy -- would reach a crucial point in five to 10 years if the problem is not resolved.
The GPIF, whose asset size is larger than both the Canadian and Indian economies, is a major force in the Japanese government bonds (JGB) market, where it parks two-thirds of its assets.
The GPIF plans to diversify its portfolio, however, by investing in emerging markets, where its hopes to start channeling funds in the financial year that starts in April.
"We are not thinking of changing our basic portfolio as a result of ratings changes by credit rating companies," Mitani said on Wednesday.
Moody's Investors Service changed the outlook on Japan's Aa2 sovereign rating to negative from stable on Tuesday, warning that government policies may be insufficient to rein in the country's huge public debt.
That warning followed Standard & Poor's downgrade of its rating on JGBs last month, its first such cut in nine years.
Bond markets showed a muted reaction to Moody's action on the view that high domestic savings will provide ample funding for the government for now.
"I don't think investors are making investment decisions based on credit rating companies' actions. Rather, they are watching overall fund flows into JGBs to make their decisions," Mitani said.
Still, it is important for the Japanese government to resolve its fiscal problems, Mitani said, adding that he shared the credit rating firms' views that the country cannot leave the debt situation as it is. He did not elaborate.
The GPIF, which invests the reserves of national and corporate pension plans, held total assets of 117.6 trillion yen as of September.
Its performance in the six-month period to September was a negative 1.5 percent, compared with a positive 7.91 percent for the whole financial year that ended last March.
The fund's performance up until September lagged other major overseas counterparts, such as California Public Employees' Retirement System (Calpers) which posted a positive return of 3 percent, while the Canada Pension Plan Investment Board produced a bigger return of plus 5.2 percent.
Besides Japanese government bonds, the fund also has exposure to domestic shares, foreign bonds and foreign equities.
Mitani said the GPIF was in no hurry to move into emerging equity markets, which have recently lost steam.
A tender to pick fund managers for GPIF's emerging market equities investments closed in December and it has completed its first round of screening, he said.
He expected the entire selection process could take about one year as the fund received a large volume of applications.
The fund decided to take on exposure to emerging markets as they are growing rapidly and offered great potential for future growth, he added.
"We don't have to rush in now as emerging market (equities prices) are in a corrective phase," he said.
"We want to take more time and we want to be more selective in choosing managers."
Mitani said the fund's investments in emerging markets would be gradual and the initial amount would be small.
The GPIF will use the MSCI main emerging market stock index .MSCIEF as its benchmark.
As of September, about more than 9 percent of the GPIF's total assets were in foreign equities.
Editing by Edmund Klamann and Muralikumar Anantharaman