Japan Ponders Establishment of Sovereign Fund

Should Japan invest some of its huge state-owned reserves, estimated at $1 trillion dollars, to revitalize its economy?  According to analysts, Japan’s foreign exchange reserves are the world’s second largest, behind China.

The recent financial crisis, resulting from the sub-prime lending activities in the United States, caused liquidity problems for several large western banks.  Several of these ailing financial institutions, such as Morgan Stanley and Blackstone, were rescued by sovereign wealth funds, owned by China.  The current debate is whether or not Japan should move some of these reserves, which are state funds, into riskier assets at a time of massive national debts and dwindling population that is unable to sustain a growing number of retirees.

The Japan sovereign fund initiative is intended to reverse Tokyo’s years of decline as an international financial center.  According to Japan’s former Financial Services Minister, Yugi Yamamoto, Japan’s financial sector became very conservative, after its economy collapsed.

Proponents of the establishment of the Japan’s sovereign fund hope that it will attract major fund managers and help revitalize the Tokyo markets much as other Asian countries, such as Singapore, has gained from similar funds.   However, the recent surge of these sovereign funds in the Middle East, Asia and Russia has authorities in the recipient countries worried about accountability and lack of transparency associated with the activities of these funds.

According to Mr. Yamamoto, about 95% of Japan’s reserve has been invested in U.S. securities and that it will not be entirely possible to sell these assets without the U.S. government’s approval.  Analysts say that if Japan sells some of its U.S. dollar assets, the U.S. dollar will slide further and effect exporters in Japan and its economic recovery.

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