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Mizuho Corporate set to buy $1.2 billion of Merrill Lynch preferred stock; no, Japan does not yet have a sovereign wealth fund

On a day when the Nikkei dropped 138.16 points to close at 13,972.63 (that’s an 8.72% loss since January 1; the Nikkei lost 11% last year), it was announced that Mizuho Corporate Bank would invest about $1.2 billion in Merrill Lynch through the purchase of preferred stock. In total, Merrill is set to issue $6.6 billion of preferred stock, of which Mizuho will get about 18 percent.

The Nikkei points out that this is the “the first time since the bursting of Japan’s economic bubble that a Japanese bank takes a capital stake in a major U.S. or European financial concern.”

Well enough. Who’s buying the other 82% of the $6.6 billion in preferred stock? The Kuwait Investment Authority, the Korea Investment Corp, TPG-Axon Capital, The New Jersey Division of Investment, The Olayan Group, and T. Rowe Price Associates.

That’s right, the New Jersey Division of Investment. Of course, $6.2 billion also came in last month from Singapore’s Temasek Holdings and Davis Selected Advisors. Merrill Lynch is set to report its fourth quarter earnings on Thursday.

Citigroup, which reported an $18 billion write-down related to mortgage investments, a $9.8 billion loss in the fourth quarter, and stated that it intends to cut dividends, is set to receive a $12.5 billion capital injection from Kuwait, Singapore and - you guess it, the State of New Jersey.

Speaking of the Korea Investment Corp, the Wall Street Journal ran a good piece on it yesterday entitled Korea Has a Sovereign Wealth Fund, Too! As the paper points out:

The South Korean government formed the company in mid-2005 to manage some of the excess reserves of the Bank of Korea. Like China and Japan, South Korea’s central bank reserves have grown enormous thanks to exports, which in Korea’s case are led by electronics, steel, autos and ships. For years, the BOK’s chief investment has been U.S. Treasuries, but they provide a relatively low rate of return and even that has been eroded by the dollar’s weakness.

Unlike China and South Korea, Japan has not set up a sovereign wealth fund. It’s been talked about, and pushed for most notably by former Chief Cabinet Secretary Yasuhisa Shiozaki, though ruling Liberal Democratic Party heavyweight (and former Chief Cabinet Secretary) Kaoru Yosano told reporters in September:

If you try to hit the jackpot or try to surpass average global yields, you can end up losing…If mistakes are made, the aftermath can be harrowing.

This is very true, and reflects the conservative nature of Japan’s Ministry of Finance.

But Japan is going to miss out. This year will most likely see a slew of such deals, as the petrodollars stack up and US/Japanese equities become available at stunning discounts. The Abu Dhabi Investment Authority is just gearing up. As one commenter in the Wall Street Journal piece wrote, “Please let us know when all of NY has been sold to foreign funds; maybe we can adopt the use of the Euro at that point.” (I guess that guy considers New Jersey foreign)

Japan, however, isn’t likely to be in the game. Despite having nearly $1 trillion in foreign reserves, it prefers to sit on the sidelines when real opportunities to boost yield come up.

Then again, when these sovereign wealth funds start blowing up and melting down at some point in the future, Japan can say it told us so. But the opportunity will have been lost.

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