(Bloomberg) -- Japan’s state pension fund, the world’s largest, should look at investing 10 trillion yen ($95 billion) in private equity and venture capital over ten years, a buyout-fund head and government adviser on pensions said.

The Government Pension Investment Fund, which manages 124 trillion yen, should start by putting as much as 3 trillion yen in private equity and venture capital in about April 2015 and increase that to 10 trillion yen by 2023, said Yasushi Ando, an adviser to the ruling Liberal Democratic Party on pensions. That would bring the fund in line with global standards, according to Ando, who is also chief executive officer of Tokyo-based buyout firm New Horizon Capital Co.

“After the global financial crisis, public pension funds have increased their private-equity investments,” Ando said in an interview on Dec. 24 in Tokyo. “Japanese companies need to normalize with world standards and procure risk money from the market in a real sense. Pension funds hold the key for that, especially GPIF.”

A panel led by Takatoshi Ito said Nov. 20 the fund should seek higher returns through risk assets as Japan targets 2 percent inflation that would erode the value of its 71.9 trillion yen in domestic bonds. GPIF should consider real-estate investment trusts and private equity, the panel said. The fund currently has no holdings in private equity.

The California Public Employees’ Retirement System, the largest public pension fund in the U.S. with $260.9 billion in assets as of Aug. 31, targets a 14 percent allocation to private equity, according to its website. The fund aims for 50 percent in publicly traded shares, and 17 percent in income investments.

Yale University’s endowment fund, which managed $21 billion as of June 30, has a target weighting of 35 percent for private equity, 6 percent in domestic stocks and 4 percent to fixed income, according to its 2012 annual report.

Industry Boost

“People think private equity and venture capital investments carry a lot of risk but volatility is actually about 15 percent less than for stocks, which have a volatility of about 20 percent,” Ando said.

A diversification of GPIF’s investments would also help Japanese industry, Ando said at a LDP committee on GPIF and other public pension funds Dec. 12.

“Japanese manufacturers are losing their global competitiveness,” Ando said. “To revive industry, trillions of yen is needed. Of course it’s best for companies to raise funds by themselves when they face difficulties, but the second-best plan is private equity.”

GPIF is under pressure to cover payouts as more Japanese baby boomers born in the wake of World War II turn 65 years old and become eligible for pensions. The Bank of Japan, led by Haruhiko Kuroda, is buying more than 7 trillion yen of bonds a month and has signaled a willingness to add more stimulus to achieve its goal. GPIF President Takahiro Mitani said Dec. 4 the BOJ won’t reach its inflation goal.

Consumer Prices

The nation’s consumer prices excluding fresh food, the BOJ’s gauge for its target, increased 0.9 percent in October from a year earlier, government figures showed Nov. 29. A gauge of prices that also strips out energy rose 0.3 percent.

“Of course bonds are generally safer but if you consider the BOJ’s 2 percent target, they’re at risk of losses over the long term,” Ando said.

The government spent 52.2 trillion yen on pension payouts in the fiscal year ended March 31, 2012, a 1.1 trillion yen increase on the previous year, according to figures published by the health ministry.

The fund held 71.9 trillion yen in local bonds as of Sept. 30, or 58 percent of assets, according to its quarterly report. Japanese stocks accounted for 16 percent, followed by 13 percent in overseas equities, 10 percent in foreign bonds and 2.1 percent in short-term assets.

Low Returns

Returns for Japan’s biggest pension funds were the lowest among 11 countries between 2007 and 2012 in local-currency terms, according to a Towers Watson & Co. report that tracks the world’s 20 largest pools of retirement savings. Japanese funds shrank 1.2 percent during the period, compared with a 0.9 percent increase in the U.S. and 16.5 percent growth in China, according to the report.

GPIF announced in June a cut to its target holdings for domestic bonds to 60 percent from 67 percent as part of the first changes to its core portfolio since starting in 2006. The targets for foreign and local shares were changed to 12 percent each, from 9 percent and 11 percent, respectively. The fund also raised foreign bonds to 11 percent from 8 percent.

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