09 March 2008

Economic Times: Japan eyes sovereign fund to reinvigorate markets

As sovereign wealth funds ride to the rescue of ailing Western banks, Japan is considering investing some of its trillion-dollar currency reserves to help revitalise its own economy.

The debate about whether to shift public funds into riskier assets comes as Asia's largest economy wrestles with huge national debts and a shrinking population that is struggling to support a growing number of pensioners.

The architects of Japan's sovereign fund plan hope that it will reverse Tokyo's slow decline as an international financial centre, and perhaps even bring a return to the heyday of the late 1980s.

"After the bubble economy collapsed, Japan's financial sector became ultra-conservative," former financial services minister Yuji Yamamoto, who is spearheading the sovereign fund initiative, told AFP in an interview.

"If Japan could attract market players as competitive as those in Singapore, then I think the corporate culture of Japanese banks and securities firms will also have to change.

"Japan will never recover the global standards that it had before just by leaving everything up to Japan's mega-banks and investment banks," he said.

The plan is to lure star fund managers from overseas to manage the money, giving a boost to the financial services industry at a time when foreign investors are becoming increasingly disillusioned with Japan.

Supporters of the scheme hope that the presence of the major league fund managers will help to reinvigorate the Tokyo markets in the same way that Singapore has benefitted from the creation of its sovereign funds.

"If we continue to let the Tokyo market go down it will probably be too late to solve the problem," said Yukari Sato, a ruling party lawmaker and former economist with a US investment bank.

Japan's foreign exchange reserves -- which topped one trillion dollars last month -- are the second largest in the world after those of China, whose sovereign fund has invested three billion dollars in private equity firm Blackstone and five billion dollars in Wall Street giant Morgan Stanley. 

© Graham Bishop