TOKYO (REUTERS) - Japan is looking to allow private sector funds and trust banks to manage a part of its US$1.27-trillion (S$1.58-trillion) pool of foreign exchange reserves in a drive to manage them better, a government source told Reuters on Sunday.

Until now the government has managed the foreign exchange reserves by itself, but its ability to do so has been stretched as the reserve roughly doubled over the past decade, thanks to massive yen-selling interventions to weaken Japan's currency.

The government needs to clear legal hurdles on its use of foreign exchange assets if it wants to draft in the services of private financial institutions and will propose amending the law during a parliamentary session that begins on Tuesday.

Current regulations limit the government to lending its foreign securities only to banks, but the new law will also permit brokerages to borrow securities, the source said, and the fees borrowers pay will help replenish government coffers.

The government will not alter its stance of investing the bulk of its foreign exchange reserves in US Treasuries and other high-grade investment bonds, and it will allow private sector institutions to manage only a few percent of the reserves, the Nikkei business daily reported on Sunday.

Japan is the world's second largest holder of foreign currency reserves after China, which held about Us$3 trillion by August, according to IMF data.

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