TOKYO, Aug 30 (Reuters) - Japan's public pension fund, the world's largest, posted an investment gain of 1.9 percent in the April-June quarter as returns were hurt by a record quarterly loss from its investment in Japanese bonds, the largest share of its portfolio.
Returns for the Government Pension Investment Fund, known as GPIF, was sharply below a record high quarterly profit of $78 billion the previous quarter and the smallest since the July-September quarter of 2012 when Japan's economy was in recession.
The relatively weak performance of the massive public fund during a period of growth could heat up a debate on whether Japan's public pension system should further reduce its exposure to the domestic bond market.
A reform panel established by Prime Minister Shinzo Abe is reviewing the investment strategy of public funds, including GPIF which collectively holds more than $2 trillion in assets.
The seven-member panel is looking into improving governance of public funds and beefing up returns on investments by raising exposure to equities and foreign assets as Japan's working population ages and payouts to retirees increase. In recent years, GPIF has underperformed major public pension funds overseas that hold a larger share of stocks and other risk assets.
The Abe-appointed reform panel is scheduled to reach a conclusion by November and aims to implement proposals by April 2015.
As of the end of June, GPIF was about 57.72 percent invested in yen bonds, 15.17 percent in Japanese equities, 9.67 percent in foreign bonds and 12.44 percent in foreign equities.
Domestic and international fund managers and market dealers closely watch GPIF's quarterly performance due to the size of its $1.2 trillion portfolio - larger than the economy of Mexico.
GPIF logged an investment gain of 2.21 trillion yen ($23 billion) in the April-June period against a quarterly record high gain of 7.63 trillion yen in the prior quarter. That translates into a positive investment return of 1.85 percent, versus 6.86 percent in the January-March quarter.
GPIF had a positive return of 9.7 percent from Japanese equities in the most recent quarter, slightly underperforming the benchmark Topix index, which rose 9.77 percent. At the same time, the fund posted a positive return of 4.01 percent from foreign bonds and 6.14 percent from foreign equities.
But those gains were largely offset by the loss of 945.1 billion yen on domestic bonds -- the biggest ever loss in value since the public fund was formed in 2001. In percentage terms the loss was 1.48 percent but domestic bonds represented about 58 percent of GPIF's total holdings.
The fund's performance over the past year has been helped by the weaker yen and gains in Japanese shares especially since November when Abe began campaigning on a platform promising aggressive reflationary policies.
In early June, GPIF changed its portfolio strategy to increase its exposure to domestic and foreign equities and foreign bonds. At the same time, the fund reduced the target for its allocation to Japanese government bonds to 60 percent from 67 percent. The move represented a significant shake-up of investment strategy since the fund was formed in 2001.
After accounting for payouts, the size of GPIF's total assets rose 0.4 percent to 121 trillion yen as of the end of June from 120.5 trillion yen in March.