UPDATE 2-Japan public fund plans $22 bln borrowing facility

* GPIF plans to set up new $22 bln borrowing facility

* Fund sees need of about 6 trln yen in payouts in 2010/11

* Oct-Dec return improves to +1.47% from 1.06% Jul-Sept

* Asset size grows to $1.37 trln, bigger than India GDP (Recasts lead, adds details)

By Chikafumi Hodo

TOKYO, Feb 26 (Reuters) - Japan's public pension fund, the world's largest, said it plans to establish a framework to borrow up to $22 billion next financial year, a step that could limit its need to sell assets to raise cash for pension payouts.

The Government Pension Investment Fund (GPIF) is a major force in financial markets, especially in domestic bonds, where it keeps two-thirds of a portfolio valued at around $1.4 trillion, larger than the gross domestic product of India.

The 2 trillion yen ($22 billion) borrowing facility would allow GPIF to tap major financial institutions for short-term funds with the aim of not having to sell bonds and other assets when they are at low prices, an official at the fund said.

"Short-term borrowing is necessary in order to secure sufficient liquidity when we need to repay benefits to pension recipients," Nobusuke Tamaki, a director-general at GPIF, told a Japanese health ministry panel on Friday.

The health ministry supervises the pension fund.

Up until the previous financial year that ended in March 2009, the pension fund was able to count on an inflow of funds from loans being paid back by semi-government entities and other public entities. But such inflows have ceased.

GPIF already faces a shortfall of 4.74 trillion yen in the current financial year to March 2010, but most of that is expected to be covered by proceeds of maturing Fiscal Investment and Loan Program (FILP) or Zaito bonds.

GPIF will likely need more than 6 trillion yen in cash for pension payouts in the financial year starting in April, Tamaki said, a good portion of which is expected to come from sales of its massive holdings of Japanese government bonds.

GPIF would sell bonds over a period of time, limiting its impact on the market, traders said. In addition, the fund should be able to cover part of that shortfall from the proceeds of maturing FILP bonds.

GPIF's current asset allocation model calls for the fund to put 67 percent of its assets in domestic bonds, 11 percent in domestic stocks, 9 percent in foreign stocks and 8 percent to foreign bonds.

GPIF is working with the government to craft a new asset allocation plan for the next five years starting from April.

A heath ministry official said on Friday the ministry hopes GPIF will continue to invest in safe assets and expects the current asset allocation model to be the base for the new model.

SMALL IMPROVEMENT

GPIF, which invests the reserves of national and corporate pension plans, also announced its investment results for the October-December quarter on Friday.

GPIF said its return on investments came to plus 1.47 percent in October-December, up from 1.06 percent in the prior quarter and netting it a profit of 1.78 trillion yen. Its third straight quarterly profit came on gains in foreign stocks and bonds.

But the conservative GPIF's showing sharply underperformed other international public funds such as the California Public Employees' Retirement System, or Calpers, which generated a return of 20.7 percent during the same April-December period.

GPIF's assets rose to 122.5 trillion yen at end-December, compared with 122.1 trillion yen in September, the fund said.

The rate of return on market investments, which excludes the FILP bonds, was plus 1.73 percent, or a 1.7 trillion yen profit.

So far during the fiscal year that started in April, the GPIF has generated a rate of return of 6.54 percent, or a 7.63 trillion yen profit, after logging a record 9.7 trillion yen loss for the previous financial year, hit by the financial crisis.

GPIF posted a positive return in three asset classes in October-December -- overseas shares, foreign bonds and domestic bonds -- while registering a loss on domestic shares.

The return on foreign shares was 9.13 percent, the highest of any asset class in its portfolio and generating a profit of 1.08 trillion yen. It was the third straight quarter of gains and followed a positive return of 10.32 percent in July-September.

Foreign bond investments returned 2.91 percent, or a profit of 289.4 billion yen, while domestic bonds produced a return of 0.58 percent, for a total gain of 364.5 billion yen.

GPIF's investments in Japanese stocks suffered a negative return of 0.18 percent, translating into a loss of 24.6 billion yen. The loss came despite a slight upturn in the market, with the benchmark Nikkei average .N225 rising 4 percent.

By the end of December, GPIF, excluding Zaito bonds, had 66.32 percent of its assets in domestic bonds, 10.60 percent in Japanese stocks, 8.02 percent in foreign bonds, 10.06 percent in foreign stocks and 5.00 percent in short-term assets. (Editing by Joseph Radford and Nathan Layne)