Sunday reading: Stephen Jen on Japan’s need for a sovereign wealth fund

July 8, 2007
By Ken Worsley

As city and ward taxes continue to rise, rollbacks on income taxes are eroded, and talk continues of a hike in Japan’s consumption tax, one has to wonder when the madness will end, and if the government can come up with a better plan for funding its coffers.

Arguing that Japan only needs to keep about $225 billion in liquid reserves to provide protection in the event of a liquidity crisis, Morgan Stanley’s Stephen Jen makes the case that Japan should set up a sovereign wealth fund, even if the idea is not politically popular right now. Here’s the first paragraph of his piece:

I believe that it makes sense for Japan to have its own sovereign wealth fund (SWF). For a developed country like Japan, with a flexible exchange rate and easy access to global capital, there is no compelling reason to maintain US$911 billion in foreign sovereign bonds. Not only does Japan have ample ability to have its own SWF, it should also be willing to do so in light of the demand that the aging population will place on the budget. Tax hikes would not need to be as large if there is a prudent SWF portfolio that generates excess returns.

To tell the truth, I think this could be marketed to the public and daily results could be made an event that could help get more folks in Japan interested in investing and willing to put some of that savings into the nation’s equity markets.

And, it would be nice if we had more cash on hand because taxes could be lowered.

Filed Under Finance, Foreign reserves