(Corrects name of pension fund in para 4 to Government Pension Investment Fund, from Government Pension Index Fund)

* Japan's GPIF resists FTSE Russell's plan to include China

* Japanese investors are biggest users of FTSE's bond index

* Their reluctance stems partly from historical tensions

* China's high yields attract foreign investors

* Some Japanese banks, insurers snapping up Chinese bonds

TOKYO, Jan 15 (Reuters) - Index provider FTSE Russell is facing resistance from some Japanese players, including the country's biggest pension fund, on a plan to include China in its World Government Bond Index (WGBI), one of the most widely-used global bond benchmarks.

Most of the concerns raised by Japanese investors focus on technical aspects, such as the lack of full convertibility in the Chinese yuan and some bond liquidity and settlement issues.

But market participants also reckon a historical mistrust between the two Asian nations is partly behind the apprehension.

Japanese investors, including the behemoth Government Pension Investment Fund (GPIF) that has 172 trillion yen ($1.66 trillion) to manage, are by far the biggest users of the index, putting the index provider in an awkward position.

"Japanese investors appear a bit inward-looking and allergic to China," said Yoshikazu Kato, Research fellow at Rakuten Securities Economic Research Institute.

"For GPIF, I would suspect investing in China would be difficult when almost 90% of Japanese people have unfavourable views on China."

The FTSE plans to start including China in WGBI from October 2021, pending an affirmation in March 2021, and Japanese opposition is not expected to derail that plan.

Market players estimate Japanese investors account for at least a half and as much as 80% of funds that are benchmarked to WGBI, though there is no solid data.

Estimates on the total size of funds that track the index range from $1.0-1.5 trillion to more than $2 trillion.

When FTSE Russell held an online meeting on Dec. 8 with Japanese investors to explain its China inclusion plan, it met strong resistance, said two sources with knowledge of the matter.

An official from the GPIF raised concerns, including the low liquidity of off-the-run issues as well as capital controls, said a participant at the meeting who spoke on condition of anonymity.

"The official was asking questions FTSE wouldn't be able to answer, like, why this problem about settlement has not been solved or what about that tax issues and so on. Those were questions that almost sounded like an opinion," the participant said.

GPIF declined to comment on what its official had said during the online session.

FTSE Russell said it cannot comment on its private exchange with market participants.

GPIF uses FTSE's indexes, including WGBI for the passively-managed portion of its investment in foreign bonds.

For the actively-managed portion, GPIF uses other index providers' benchmarks that exclude China.

Some fund managers think the fund might do the same if China joins the WGBI.

GPIF currently has almost no exposure to Chinese government bonds. It only has 1.3 billion yen ($12.54 million) of euro-denominated bonds issued by China.

A spokesman for the GPIF said the fund is currently excluding Chinese bonds because of China's regulations on foreign investors.

"Since there is still some time left before the inclusion, we will be considering how we will deal with that. At this point, we haven't made any decision," he said.

The providers of two other major bond indexes -- Bloomberg Barclays and J.P. Morgan -- have already added China after Beijing's reforms of its debt markets to satisfy foreign investors.

Global investors have welcomed the inclusion as Chinese bonds offer higher yields averaging more than 3%, compared with around 1% in the United States, zero in Japan and negative in most European countries.

Even in Japan, many big banks and insurers have been dabbling in Chinese bonds. Since 2018, Japanese investors have been buyers of Chinese bonds for every month but two.

"Japanese investors are never leaders. They tend to be followers. Their stance could change if they find everyone else is buying China," said Rakuten Research's Kato.

($1 = 103.67 yen) (Reporting by Hideyuki Sano, with additional reporting by Andrew Galbraith in Shanghai; Editing by Vidya Ranganathan and Simon Cameron-Moore)