Known as GPIF, the pension fund, whose 108.1 trillion yen ($1.35 trillion) in total assets nearly matches the size of the Spanish economy, has become a net seller of its assets in recent years as it tries to cope with Japan's rapidly aging population.

Market analysts expected the investment in emerging market equities to start at around several hundred billion yen, too small to have a big impact on overall returns, but said the move was an important step to diversify the fund's portfolio.

"It's a natural move for the GPIF to take exposure in emerging markets to incorporate into the region's potential growth as it is becoming more difficult to raise returns only by investing in developed countries," said Hidenori Suezawa, assistant general manager at SMBC Nikko Securities.

"This will not lead to an improvement in its performance because the size of the investment is expected to be small. But it's important to watch how investments in emerging markets will grow in the future," he added.

The pension fund, which issued a tender for active and passive managers in October 2010, selected Invesco (IVZ.N), Nomura Asset Management, Nomura Funds Research and Technologies, Mizuho Asset Management, Sumitomo Mitsui Asset Management and Lazard Asset Management (LAZ.N). It said there were no suitable managers for passive investments.

Sources told Reuters in September 2011 that 11 companies were on the final shortlist.

The five companies dropped from the final list were Chuo Mitsui Asset Management, T&D Asset Management, Neuberger Berman, BNY Mellon (BK.N) and BNP Paribas Investment Partners.

PAYOUTS AHEAD

The public fund became a net seller of its assets for the first time in the financial year that ended in March 2010 as it started to pay out more in benefits than it received in contributions to the national pension.

It sold a total of 4.77 trillion yen in assets during the financial year ending March 2011. Of that total, it sold 405 billion yen in foreign securities and the rest were in domestic bonds.

In the year to March 2013, when the first wave of Japan's baby boomers is set to turn 65 and becomes eligible to receive pension payments, the public fund would need about 8.87 trillion yen of cash for pension payouts.

Takahiro Mitani, chairman of the GPIF, told Reuters in an interview in April the amount of cash needed to repay pension recipients appeared to be getting larger than the original forecast compiled by the government three years ago.

Along with more retirees, fewer people are contributing to public pension plans. Lower salaries and companies hiring fewer full-time employees are limiting inflows into the public pension scheme, Mitani said.

The situation of Japan's aging population is set to worsen in the years ahead. The population is expected to fall by 30 percent to less than 90 million by 2060, with two out of every five people being 65 or older, a government agency survey showed in January.

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Graphics on Japan's ageing population:

link.reuters.com/dyv68r

link.reuters.com/zyr87r

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The GPIF allocates its funds in four asset classes - foreign equities, domestic equities, foreign bonds and domestic bonds.

The investment in emerging market equities will be allocated from the foreign equities portfolio, which had an asset size of around 10.9 trillion yen ($137.2 billion), or about 10 percent of the total portfolio, as at December 2011.

Officials at the GPIF said the public fund's investment in emerging markets would be small to start with, but declined to give a specific figure.

The MSCI Emerging index would be used as a benchmark, the fund said.

The pension fund makes allocations in line with its model portfolio, which gives a weighting of 11 percent to domestic stocks, 67 percent to domestic bonds, 9 percent to foreign stocks, 8 percent to foreign bonds and 5 percent to short-term assets.

($1 = 79.7900 Japanese yen)

(Reporting by Chikafumi Hodo; Editing by Jacqueline Wong and Richard Pullin)

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