Japan's pension funds are moving assets into emerging markets and alternative investments, while maintaining high cash levels.

A survey of 135 pension funds conducted by JP Morgan Asset Management finds a gradual decrease in allocations to domestic equities in favour of global allocations, particularly to emerging markets.

Two years ago, a similar survey by JP Morgan AM found pension funds allocating 17.6% to foreign equities and 6.3% to alternatives. The financial crisis saw foreign equity allocations dip, although these have recovered to 17.1% today.

However, 52.6% of respondents say they will increase allocations to emerging equities, while 35.5% say they will increase allocations to alternatives and 31.3% say they will increase exposure to emerging-market debt. Only 13.6% say they will increase allocations to foreign equities in general.

Moreover, hardly any respondents say they will reduce their exposure to emerging-market equity or debt, and very few will cut back their allocations to alternatives. But 22.7% say they will reduce their exposure to foreign equities in general.

And a whopping 32.3% say they will reduce exposure to Japanese equities (and only 3.1% say they'll increase this).

Overall, therefore, Japanese pension funds are reducing their risk exposure, but they are restructuring how they position that reduced risk budget.

Among alternative assets, the number of terminated assets in absolute-return investments has been much larger than new mandates, says Hidenori Suzuki, head of JP Morgan AM's strategic investment advisory group.

"However, in private equity and real assets, the number of new markets was larger than terminated mandates," Suzuki says. "This indicates that pension funds are trying to further diversify the types of assets they invest in."

JP Morgan AM recorded 74 cases of terminated absolute-return mandates over the past 12 months, versus 55 new mandates. But in private equity it recorded 17 new mandates and only one termination. In real assets (including real estate, infrastructure and commodities) the picture is mixed, with 12 terminations and 18 new mandates.

Suzuki believes the trends captured in this survey are likely intended for the medium to long term. Now that the financial crisis has settled, Japanese pension plans are looking to achieve a more efficient risk/return profile and a more balanced portfolio, by diversifying more.

In addition, the survey confirms the conservative nature of Japanese pension asset allocation. Domestic bonds have risen as a proportion of schemes' asset allocation, from 31.8% in 2008 to 35.9% in 2010. Cash and cash-equivalent levels fell during the crisis, but have been rebuilt to 8%.

Total risk assets (including domestic equities, overseas fixed income and alternatives) have shrunk from 60.2% of the average portfolio to 56.2%.