The government plans to outsource management of some of its foreign exchange reserves to private financial institutions, such as trust banks, as early as fiscal 2014 to boost investment returns and strengthen risk control.

Hoping to tap into investment expertise of private sector financial institutions, the government will submit special account reform legislation to the ongoing extraordinary session of the Diet on Friday, sources said.

Currently, the government manages all of its foreign exchange reserves in its foreign exchange special account.

As of the end of September, Japan’s foreign exchange reserves totaled $1.273 trillion, the second-largest amount in the world after China. The pool has grown due to yen-selling, dollar-buying currency market intervention aimed at halting the yen’s rapid rise.

Most of the reserves are currently invested in foreign bonds, such as U.S. Treasuries. The government earns interest on them and fees for lending bonds out of its holdings to banks.

The legislation on special account reform will call for allowing private sector financial institutions to manage some of the reserves under trust or discretionary management contracts.

Under the legislation, the government would also relax the current restrictions so that it can lend bonds to brokerages in addition to banks and lift a ban on investment in derivatives trading, the sources said.

To avoid excessive risk exposure, however, the government intends to limit reserves that can be outsourced to private sector management, according to the sources. It will also exercise caution before using derivatives trading.

In addition to the revision to reserve management in the foreign exchange special account, the legislation would scrap the social infrastructure project special account, which chiefly manages funds for road construction, and combine three special accounts, including one to ensure stable food supply.

As a result, the number of special accounts will fall to 15 from 18.