TOKYO (Reuters) - Japan's government will approve new allocation targets for the world's biggest pension fund on Friday, aiming to raise its holding of Japanese shares to 25 per cent of its portfolio from the current 12 per cent, two government sources said.

The US$1.2-trillion (S$1.53 trillion) Government Pension Investment Fund (GPIF)is under pressure from Prime Minister Shinzo Abe to shift funds towards riskier, higher-yielding investments to support the fast-ageing population, and away from low-yielding Japanese government bonds.

GPIF's allocations are closely watched by global financial markets, as a 1 percentage-point shift means a transfer of more than US$10 billion. With assets bigger than Mexico's annual economic output, the fund is considered a bellwether for other big Japanese institutional investors.

"For the stock market, we're going to see a huge impact,"said Hiroyuki Nakai, chief strategist at Tokai Tokyo Research Centre. "What we're seeing in reality is trust banks starting to buy at a high pace," he said. "This month they've bought about 543 billion yen (S$6.35 billion) in shares, compared with 79 billion last month."

A panel of the Ministry of Health, Labour and Welfare will discuss the GPIF reallocation plan in the afternoon before Minister Yasuhisa Shiozaki gives final approval, the sources said.

The target for foreign stocks is also expected to rise from its current 12 per cent target, the sources said. The Nikkei newspaper said the giant fund would cut its yen-bond target to 35 per cent and boost domestic and foreign share weightings to 25 percent each.

A GPIF spokesman declined to comment on the reallocation, saying it was still under discussion.

The benchmark Nikkei average was up about 1 per cent in early trade on Friday, buoyed by the GPIF news.

People familiar with the process told Reuters earlier this month that GPIF would raise its domestic stock weighting to around 25 per cent and cut JGBs to about 40 percent, increase investment in foreign stocks, and consider a 5 per cent allocation for alternative investments such as infrastructure and private equity.

GPIF for the first time reduced JGBs to less than half its assets in the third quarter, a person with direct knowledge of the allocation told Reuters on Wednesday.

The fund now targets 60 per cent JGB weightings under its model portfolio but has considerable leeway to move above or below the targeted levels in the model portfolio. Domestic equities comprised 17 per cent of holdings at end-June.