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TOKYO (Reuters) - Japan's public pension fund, the world's largest with $1.2 trillion (780.5 billion pounds) in assets, believes the Tokyo stock market has room to rally to catch up with of share prices of the United States and Europe, chairman Takahiro Mitani told Reuters on Wednesday.
He said in an interview that major U.S. indexes have hit record highs and European shares have recovered significantly, but Japan's Nikkei stock average is still stuck near 13,000, well below where it peaked about a year before the bankruptcy of Lehman Brothers in September 2008 and the start of the global credit crunch.
"Without saying the Nikkei will climb back to 18,000, I don't think the current upward trend will stop at around 13,000," Mitani said.
In early June, the fund, which manages reserves for the national pension system, announced a change to its portfolio that allowed it to keep more money in stocks and less in the government bonds that represent the bulk of its holdings.
Mitani said the government of Prime Minister Shinzo Abe appeared determined to shake up the administration and investment policies of the public pension system, pushing for a more aggressive investment policy such as followed by funds in Norway and Canada, and that could result in an even larger allocation of money to equities and foreign assets.
"We've always faced people who called on GPIF to be more conservative or more aggressive," Mitani told Reuters. "In the current government I have the feeling the aggressive wing is more powerful."
The GPIF raised its Japanese stock allocation to 12 percent of its portfolio from 11 percent in early June, while lowering its allocation to Japanese government bonds to 60 percent from 67 percent, the most significant shake-up of its portfolio strategy since the fund was formed in 2001.
Mitani said he expected yields on JGBs to fall and stabilise as the Bank of Japan continues buying bonds.
"The BOJ only started buying from April. I feel yields can slightly fall and stablise as the BOJ continues buying in July, August, and September," Mitani said against the backdrop of turbulent bond market coming to terms with an unprecedented asset-buying campaign by the Bank of Japan.
That campaign has pushed the yen lower and had lifted the Nikkei by more about 20 percent on the year, aided by the weak yen boosting exports.
Mitani said he expected the weakening yen trend to continue because of Japan's trade deficit and an upward trend in U.S. interest rates expected to accompany a tapering of the Federal Reserve's quantitative easing, seen starting later this year.
A central element of the government's "Abenomics" strategy is to reform Japan's public pension system, starting with the GPIF. A panel to be headed by University of Tokyo professor Takatoshi Ito will consider how to improve return on investments as Japan's working population ages and payouts increase.
Critics have long said GPIF lacks the staff, budget or investment mandate to keep pace with other large public funds. It has more than $1 trillion under management, but only about 70 staff. The highest-paid employee is Mitani, who made the equivalent of $192,000 for the fiscal year ended March 2012.
GPIF hit its own internal return targets in recent years, a payout of 1.1 percentage point over wage increases, but that was helped by falling salaries in a deflationary economy.
Japanese wages on average have dropped by almost 1 percent per year over the past nine years. GPIF's total return on investment over the same period averaged 2.4 percent a year based on a target portfolio that had allocated two-thirds of the fund to domestic bonds.
"All we can do right now is calmly wait for the outcome of the panel," Mitani said. "We'll obey the government's decision if it decides to change the law or the framework for us to be more aggressive."
($1 = 97.7350 Japanese yen)
Reporting by Chikafumi Hodo and Takaya Yamaguchi; Editing by Eric Meijer