* New panel retains balance of academics and economists
* Asset size of GPIF larger than economy of Mexico
* Members to play key role in setting new allocation targets (Adds Citi's comments)
By Chikafumi Hodo and Takaya Yamaguchi
TOKYO, April 22 (Reuters) - Japan overhauled the world's biggest public pension fund on Tuesday, appointing new committee members, in a push toward Prime Minister Shinzo Abe's goal of a more aggressive investment strategy.
The government announced a reshuffle of the Investment Committee of the $1.26 trillion Government Pension Investment Fund (GPIF), in line with Abe's drive to have the fund make riskier investments and rely less on low-yielding government bonds.
Global financial markets are keenly watching GPIF's investment strategy as the fund, bigger than Mexico's economy, is a huge investor and a bellwether for other Japanese institutional investors.
The new committee will play a leading role when GPIF sets its new investment allocation targets over the coming months. Abe has promised GPIF reform as an element of his growth strategy, the "third arrow" in his policy, following aggressive monetary and fiscal stimulus.
Health Minister Norihisa Tamura, who appoints the GPIF Investment Committee members, shrank the panel to eight members from 10 as part of the overhaul. Two members retained their seats and one former member was brought back on.
Tamura said on Tuesday he hopes that new investment advisers will use their expertise to raise investment returns, while controlling risks and taking into account economic development in setting up new investment targets.
"The interests of pension beneficiaries come first in pension fund management," Tamura told a news conference after the regular cabinet meeting.
The panel retains a balance of academics and economists, with one representative each from the main trade union federation - whose pensions are at stake - and the biggest business lobby.
But in a sign of Abe's more aggressive strategy, three of the now eight members sat on the advisory panel that spearheaded a change in the fund's strategy last year to achieve higher investment returns.
They are Sadayuki Horie, senior researcher at Nomura Research Institute; Isao Sugaya of the JTUC Research Institute for Advancement of Living Standards, a think tank of Japan's top labour federation; and Yasuhiro Yonezawa, a professor of Waseda University's graduate school of finance.
Yonezawa, an expert on pension matters, headed the GPIF Investment Committee from 2008-2010 and sits on several advisory panels of the Health Ministry's Pension Fund Bureau.