A Financial Times story tells us that Japan is contemplating creating a special state investment fund that would be an active manager, along the lines of Singapore’s Temasek. If it comes to fruition, this development would be a major shift, since it would be far and away the biggest and most influential fund of that sort.
The creation of this fund would also have a direct impact on the United States. Right now, the bulk of Japan’s foreign currency holdings are in dollars. Any prudent investor would have greater currency diversification, and having Japan cut its position (or shift its allocation by reducing new dollar purchases substantially) would reduce an important source of funding for our trade deficit. In other words, a big negative for the dollar.
This move is likely to revive demands to invest the Social Security trust fund in stocks. I have been leery of this idea. First, any enabling legislation is likely to be drafted in such a way as to be a sop to Wall Street, an industry which seems to do just fine without pork. Second, investment strategies are likely to be constrained in ways that won’t help performance. Third, since Social Security is really a pay-as-you-go system, the idea that it represents an investment is illusory, and reinforcing that illusion isn’t good for people under 55 who will almost certainly receive much less generous benefits.
From the Financial Times:
Japan is considering establishing a special state investment fund – modelled on Singapore’s Temasek – to manage part of its $909bn in foreign exchange reserves and improve returns while mitigating the long-term impact of the country’s ageing population.
The idea is being discussed within a key economic advisory council headed by Shinzo Abe, prime minister, by the policy study group of the Financial Services Agency, and also within the ruling Liberal Democratic party. The discussions follow similar moves by neighbours China and South Korea.
Although the debate is in its early stages, any shift to a more active investment approach by traditionally conservative Japan would have a major impact on global markets. For the most part, the country’s foreign exchange reserves are invested in US Treasuries.
Japan’s declining birth rate means that by 2015 more than one in four Japanese will be 65 or over, while the working population is forecast to shrink almost 10 per cent by 2030.
A break-up of the country’s Government Pension Investment Fund, the world’s largest with assets of Y160,000bn ($1,347bn), is also being considered as part of moves to secure better returns for Japanese savings.
“There is growing momentum behind the view that all sorts of [Japanese] public funds have to be managed effectively,” said Kotaro Tamura, parliamentary secretary of the cabinet office for economic and fiscal policy and financial services.
One idea is for Japan to follow in the steps of Singapore and Scandinavian countries, which invest foreign reserves more actively and therefore obtain better returns. Mr Tamura said he saw Temasek, the Singapore government’s investment arm, which invests in a broad range of companies both in Singapore and overseas, as the best example.
Policymakers are concerned the GPIF, which manages public pensions as well as the pensions of private-sector salaried workers, has grown too big and is securing only low returns, Mr Tamura said. According to the most recent figures available, the GPIF’s return for April to December 2006 was just 3.63 per cent.
At the same time, there is concern that the GPIF’s concentration of investments in Japanese government bonds is a risk.
The GPIF has a target for this year to invest 58.5 per cent of its assets under management in domestic bonds and 10.5 per cent in foreign bonds rated triple-B or higher. Just 17.9 per cent is to be invested in domestic stocks and 13.1 per cent in foreign stocks. It is not allowed to invest in alternative investment products.
Changing the investment stance of public funds would also go a long way towards making Japan a more dynamic financial centre, Mr Tamura said.
“One factor behind Singapore’s development is that they brought in professionals to manage public funds and that led to the development of [local] professionals,” he said.
Both the MoF (through DIC), and the BoJ (through BPSC) have great cost bases on their acquired holdings. Of course that followed a decade of crap intervention through the notorious PKO (price-keeping operations) which were actual operations akin to magic market operations attributed to the US’s own (alledged) Plunge Protection Team.
But PKO in Japan was real money – postal savings, government pensions, etc. directed to Trust bank agent-managers to “support the market” at key points or when the market was perceived to be too weak and falling too fast for MoFs own liking.
The HKMA bought any and all stock in 1998 at rock-bottom prices, warehousing it ostensibly for HK retirement funds. Wonderful intervention by a state authority to stabilize markets, and make nice investment returns for plan beneficiaries (and taxpayers alike).
Temasek is perhaps a model of active investment, but CDC in France, (and quebec), ABP in Hollands, CALPERs, Teachers in Ontario, all have invested vast sums as fully or quasi-public institutions with excellent results, and if anything, positive political outcomes where and when introduced.
I personally think the record in aggregate is actually favourable for investment by quasi-public bodies, provided they remain independent of political slavery and interference, have firm goal, good management and oversight with active Weberian boards.
I think Japan will find it harder than most to achieve this combination and will find themselves embroiled in controversery as MoF again tries to employ the funds for general mercantile, rather than optimal investment, gain.