Japan Encounters Calls for Creation of a Sovereign Wealth Fund

Seiji Maehara, Japan's ruling party's policy chief, has asserted that the country should set up a sovereign-wealth fund to fight the high yen.

(September 28, 2011) — Similar to recent domestic and international pressure for Australia to create a sovereign wealth fund, Japan is now facing similar urgent calls.

Democratic Party of Japan (DPJ) policy chief Seiji Maehara has asserted in an interview with Dow Jones Newswires that the country should consider a sovereign wealth fund to fight the strong yen. Furthermore, he noted that he aims to sell as many government assets as possible to lower reliance on tax hikes in order to help fund earthquake reconstruction. “We would like to consider a national fund, or a so-called sovereign wealth fund,” Maehara said in an interview with the publication, adding that Prime Minister Yoshihiko Noda was considering such a move.

While the creation of a sovereign wealth fund in Japan has been favored by some lawmakers, the risks of global investment have thwarted progress. With Japan ranking as having the world’s second-largest foreign reserves (which are held in foreign currencies), Maehara told the Dow Jones Newswires that a sovereign wealth fund that would purchase foreign assets by selling the yen is needed to stem the yen’s strength.

Other countries have faced similar urgency to create a sovereign fund. While trade unions and institutions worldwide have urged the Australian government to create a sovereign wealth fund, the country’s Prime Minister Julia Gillard asserted last month that superannuation is already a trillion-dollar sovereign wealth fund–but with market benefits. She noted that the country’s superannuation regime is robust enough to stand in the place of a sovereign wealth fund.

“That’s because it’s privately managed by thousands of trustees instead of a sovereign wealth fund managed centrally by a Canberra-appointed manager,” Gillard said in an address to the Financial Services Council in Sydney, Money Management reported. “Or alternatively, you could say that Australia has 8 million sovereign wealth funds–the superannuation accounts of Australians across the country.”

This is not the first time that widespread calls for Australia to establish a commodity-backed sovereign wealth fund has been met with stiff resistance. Australia is faced with the question of what to do with the proceeds of a large surge in demand for its vast deposits of coal and iron ore. At the heart of the dispute is whether Australia should try to emulate Norway by establishing a sovereign wealth fund or rather impose a tax on mining profits as the best way of capitalizing on the boom. In May, the International Monetary Fund (IMF) urged Australia to create a sovereign wealth fund to protect the country against a possible Asian market bubble. IMF director Anoop Singh said at the time that the revenue from the current resources boom should be saved “to ensure a more equal distribution of its benefits across generations and reduce long-term fiscal vulnerabilities from an aging population and rising health care costs.”

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742