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Morgan Stanley, Citibank, Sapporo, Sovereign Wealth Funds and Foreign Reserves: It’s Getting Political

February 19, 2008
By Ken Worsley


After hearing rumors that Wal-Mart may be looking for Citibank to provide a capital injection for struggling supermarket operator Seiyu, we found this morning’s announcement that Morgan Stanley is set to purchase Citibank’s Tokyo headquarters for 48 billion yen quite interesting. Over lunch, someone suggested that selling their head office just might give Citi enough cash to lend Seiyu a helping hand. I laughed out loud. That’s not going to happen, right?

But Morgan Stanley has been playing the Tokyo property market quite well over the past few years, just having sold the Tokyo Westin to the Government of Singapore Investment Corporation for about 77 billion yen. Morgan bought the Westin from Sapporo Holdings in 2004 for about 50 billion yen. That’s over a 50 percent return on investment in under 4 years.

Sapporo posted 5.51 billion yen in net profit in 2007, up from 2.34 billion in 2006, a result that was backed in large part by - you guessed it - asset sales. As we speak, Sapporo’s management remains focused on putting some form of takeover defenses in place, which it plans to announce by March 5.

Back to Singapore: the Government of Singapore Investment Corporation’s purchase of the Westin, as well as other high-profile moves by sovereign wealth funds, appears to have waken some sleeping giants in Nagatacho. We know that former Chief Cabinet Secretary Yasuhisa Shiozaki has been pushing for more discussion leading toward the formation of a Japanese sovereign wealth fund for some time now, but the Ministry of Finance has wanted nothing of it.

At any rate, the ruling Liberal Democratic Party has announced plans to set up a task force that will study the creation of a sovereign wealth fund. The team will be headed by former financial services minister Yuji Yamamoto, a man who has a long history of butting heads with Ministry of Finance bureaucrats (and ministers).

Apparently, Prime Minister Yauso Fukuda has requested that Yamamoto proceed “cautiously” on the issue, a statement that strikes us as more Fukuda than anything else the Prime Minister has said since coming to power.

Hopefully part of the study will involve what Stepen Jen had to say about Japan forming a sovereign wealth fund way back in July of last year. Jen’s argument, which centered on the idea of Japan keeping about $225 billion in liquid reserves and putting the rest into an SWF, made the following case:

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.

Hopefully the right person(s) are hired to manage the fund, and it won’t end up losing money, like Japan’s pension funds have somehow managed to do. At any rate, let’s bear in mind that Mr Jen works for Morgan Stanley, and as we saw above, they know a thing or two about making money.

Last October, we predicted that Japan’s foreign reserves would cross the $1 trillion mark in June 2008. It now seems set to happen sooner than that, if not next month (feel free to speculate on a subprime connection).

With China investing about one seventh of its foreign reserves in the China Investment Corporation back in September 2007, is it about time for Japan to follow Mr Jen’s advice? We believe so - though we also remain firmly convinced that most sovereign wealth funds will eventually blow up and turn into huge public bailouts.

Nonetheless, Japan’s leadership needs to show that it’s willing to take chances and assume some risk. Caution is not going to solve the impending budget/demographic/pension/debt-to-GDP-ratio crisis. Real leadership and fresh ideas just might. It might not, but what do they have to lose?

Just ask Sapporo.

Filed Under Finance, Foreign reserves, Politics 

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Comments

14 Responses to “Morgan Stanley, Citibank, Sapporo, Sovereign Wealth Funds and Foreign Reserves: It’s Getting Political”

  1. fastower on February 20th, 2008 11:32 am

    Well done…there are some good isuues here. I think a lot of foreign observers would assume Fukuda’s wanting ‘caution’ as hopelessly conservative, but he’s probably aware that many in the bureaucracy see this as an opportunity to get cushy positions at an easy job. Turning a SWF into pork is a real danger, especially with the DPJ around wanting to get its piece of the pie.

  2. Kraig on February 20th, 2008 1:41 pm

    Will Japan have much of a choice? If it wants to be in on coal, oil, gas and metals in a few years, it’s going to have to start buying some of their producers up on the market. India’s talking about doing it now too.

    India, China et al. could make a killing buying up these producers and jacking up the prices for Japan. Future energy security and food security are going to leave them no other choice.

  3. Ken Worsley on February 20th, 2008 3:36 pm

    fastower, think any lingering anger/insecurity over the impending approval of Mr Muto to the BOJ governor position has anything to do with it?

    Kraig, this policy was being pushed under the Abe administration - remember the trip to the Middle East with the few hundred “business leaders” in tow? And might those folks start to feel a little chafed if suddenly the private sector has to compete with the public sector for bids?

  4. WG on February 20th, 2008 9:02 pm

    You’ve hit the nail on the head here…why can’t we get this kind of analysis from the mainstream media? Being beholden to advertisers is a very limiting force.

  5. Paz on February 21st, 2008 7:00 pm

    And now Citibank’s talking about pulling out of the consumer lending market altogether. They probably should have done it when the laws on interest rates changed. That’s an industry in too much trouble to waste time on.

  6. Willie on February 22nd, 2008 11:40 am

    This is a very important topic in a lot of ways. Would an SWF be solid if we enter into a subprime depression in the West? Is it likely that one would be run well, without excessive cronyism or more insane waste on construction? Japan isn’t Singapore, unfortunately.

    Also, what does the DPJ think about this? The LDP, despite its arrogance, may be unable to just do what it wants in a vacuum.

  7. Bdog on February 22nd, 2008 1:59 pm

    Japan isn’t Singapore, unfortunately.

    care to elaborate ? is there no cronyism in Singapore ?

  8. Ken Worsley on February 22nd, 2008 5:40 pm

    Oh please, give it up. There is cronyism everywhere, but Willie has an excellent point. Amakudari plagues institutions such as these, and running a fund such as an SWF should not be seen as a position doled out as a pork reward for years of service. Real talent needs to be recruited and brought in if this is to work. Look at the Shinginko situation - I don’t think it’s an aberration or a drop in the bucket:

    http://www.nni.nikkei.co.jp/AC/TNKS/Search/Nni20070617D17JF298.htm
    http://www.bloomberg.com/apps/news?pid=20601101&sid=acWDJiVzWu0w
    http://www.nni.nikkei.co.jp/AC/TNKS/Search/Nni20080220DA0J2202.htm

    Possibility of charges being brought against members of the management:
    http://search.japantimes.co.jp/cgi-bin/nb20080221a1.html

    Good stuff on the NBR forum:
    http://www.nbr.org/foraui/message.aspx?LID=5&pg=1&MID=31470

  9. Willie on February 22nd, 2008 11:49 pm

    Ken,

    Those are good links.

    Bdog,

    My travels to, and business with, Singapore have been limited. But the waste, cronyism, and government incompetence there are an order of magnitude less than Japan or Chicago. Even the critics of the regime there would agree on this.

    Meanwhile, back in Japan, we have to worry that a lot is being kept under wraps as the press is not exactly noted for its investigative journalism.

  10. herv on February 23rd, 2008 9:38 am

    http://www.nni.nikkei.co.jp/AC/TNKS/Nni20080222D22JFA11.htm

    Japan, along with China, has helped finance the U.S.’s deficit spending through Treasury purchases. Some worry that if Japan alters its investment portfolio, bilateral relations could be impaired.

    Former Financial Services Minister Yuji Yamamoto, chairman of the panel, said the U.S. would be OK with Japan reinvesting only gains from the reserves into other assets.

    Did China ask for US approval?

  11. Reese on February 23rd, 2008 4:21 pm

    China has no defense ties to the US and the US has no leverage to get them to buy T-notes. Why not ask the same questions of Korea, Singapore, Kuwait or the UAE?

  12. Ken Worsley on February 24th, 2008 8:03 pm

    I have a feeling that Yamamoto was just making that up anyway…I don’t see any evidence that it came from a US source. I’d love to see a reporter ask a Treasury department spokesperson where the US stands on Japan creating a sovereign wealth fund and if that might have any impact on Treasury purchases. Yamamoto’s going to have to back up such statements if they’re going to be read in non-domestic media.

  13. Ken Worsley on February 26th, 2008 11:02 pm

    Willie:

    “Would an SWF be solid if we enter into a subprime depression in the West?”

    If a ‘depression’ hits? Absolutely. That would put share prices at a massive discount and with lots of cash to spend, and SWF can start pulling in assets for the long haul at very cheap prices.

    But I’m not convinced that such a monumental buying opportunity will present itself.

  14. Shinsei Bank sells Tokyo headquarters, joining Citibank; Resona announcement due by the end of the month Japan Economy News & Blog - Business, Economy, Marketing and Economic Reports on March 13th, 2008 9:17 pm

    […] We might find part of the answer in the fact that Morgan Stanley’s recent sale of the Tokyo Westin hotel to the Government of Singapore Investment Corporation for about 77 billion yen brought a return of over 50% in under four years. […]

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