TOKYO REPORT: Debate Grows over Creation of Sovereign Wealth Fund in Japan

Tokyo, Jan. 19 (Jiji Press)–Efforts to establish a sovereign wealth fund, a state-owned investment vehicle intended to manage and grow national assets in the public interest, are gathering momentum in Japan. Many politicians and experts emphasize the need for such a fund, but skeptics question whether the idea is realistic given the dire fiscal situation. “In a country burdened with massive public debt, where are the financial resources supposed to come from? Isn’t this just a pipe dream?” one market participant said. SWFs operated by oil-producing nations such as Norway and countries in the Middle East, as well as by Singapore, are widely known for their large-scale strategic investments around the world. In Japan, momentum for creating an SWF surged within the ruling Liberal Democratic Party in 2008, but the idea was derailed by the global financial crisis exacerbated by the collapse of U.S. investment bank Lehman Brothers. Key Policy for Komeito In August last year, Komeito identified the creation of a government-affiliated investment fund as a priority policy. To advance the initiative, the party established an internal committee, chaired by House of Councillors member Isamu Ueda, to examine the feasibility of creating a Japanese SWF. Between August and Dec. 19, the committee held nine meetings and released an interim report on the final day of the period. In the report, the panel proposed consolidating several types of public-sector assets–specifically, those held in the foreign exchange fund special account, the Government Pension Investment Fund and the Bank of Japan. Instead of managing these assets separately, the committee recommended integrating them into a single pool. According to the report, unified management would allow more efficient investments, reducing risk while increasing returns. At a briefing on the report, Ueda emphasized that establishing an SWF would help “secure financial resources to ease burdens on the working generation and implement the policies that will be needed in the future.” He added, “We strongly hope to see it realized soon.” Daisaku Hiraki, an Upper House lawmaker and secretary-general of the committee, noted that conditions for creating an SWF have improved, pointing to the time that has passed since the bursting of speculative bubbles in Japan’s economy and to rising financial literacy among the public. He underscored the fund’s importance, saying, “We have moved on from the years of deflation, when it was acceptable simply to hold cash, to a phase of inflation, making it necessary for us to take a step further.” Mitsunari Okamoto, chair of Komeito’s Policy Research Council, reflected on the party’s past role, as a member of the ruling coalition, in establishing the GPIF’s asset management framework. “If government economic policies help boost corporate earnings, stock prices will rise. I have long wanted to create a system that allows people to directly share in these gains,” he said. The committee is expected to compile its final report soon and will urge other political parties to consider the institutional design within a cross-party framework. It plans to establish a cross-party league of lawmakers in the next fiscal year, starting in April, with the aim of submitting lawmaker-initiated legislation. Managing Foreign Exchange Reserves On Dec. 16, the University of Tokyo Center for Applied Capital Markets Research, or UTCMR, released a policy proposal calling for the creation of an SWF to oversee the management of Japan’s foreign exchange reserves, which totaled 1,359.3 billion dollars as of the end of November. In its proposal, the UTCMR cited a U.S. study showing that public institutions such as the GPIF and the BOJ, as well as the foreign exchange reserves special account, have been rapidly increasing their exposure to risk assets. The proposal emphasized the importance of gaining a comprehensive understanding of the overall risks borne by the public and managing them in an integrated way. Recognizing the current lack of clarity over how the funds are being used, the UTCMR advocated the creation of a fully transparent system for fund management and administration. The center also recommended that investments in U.S. Treasury securities be maintained for now, while in the future allocating a small portion–several percent–of the total funds to investments that foster strategic industries and support economic diplomacy. At a news conference the same day, Kenji Kutsuna, director of the UTCMR, said: “Ensuring stability and sustainability in public finances is essential. With risks rising due to higher interest rates, we believe there is a growing need to establish an SWF.” Kutsuna argued that clearer rules are needed to properly assess overall risk and serve the national interest. He identified three essential pillars for a future SWF: efficient fund management by private-sector professionals; transparency through robust disclosure; and independence of fund management, free from political interference. He added that he envisions leveraging the GPIF’s existing investment platform and appointing private-sector professionals to oversee day-to-day management. The UTCMR was established with a donation from Oki Matsumoto, chairman of online brokerage house Monex Group Inc. The center aims to revitalize companies and the broader economy by strengthening the functions of capital markets. At a news conference, Matsumoto emphasized the importance of how foreign exchange reserves are managed. “A 10-basis-point difference (in investment returns) translates into trillions of yen,” he noted. “First, we must ensure sound management and a clear understanding of the risks. Then we should consider using the resulting profits as a general revenue source. They represent a financial resource that is quite promising.” Concerns Previous discussions about establishing a Japanese SWF took place before the 2008 global financial crisis, but momentum was lost in the aftermath. Takuma Torige, head of financial research at Daiwa Institute of Research Ltd., noted that “careful deliberation based on an adequate understanding of the fiscal situation and various concerns are needed for building a national consensus.” The management of public funds raises several issues. There are questions about whether it is possible to generate stable investment returns over the long term and whether such a fund can remain completely insulated from political influence. Some critics argue that priority should instead be given to repaying government debt or implementing tax cuts. Torige also pointed to another risk. If public funds come to dominate a limited set of investment opportunities, “the room for investment by private-sector funds will be reduced, which in turn may distort the allocation of resources.” END [Copyright The Jiji Press, Ltd.]