No Surprise: Ministry of Finance working against moves to set up sovereign wealth fund

March 11, 2008
By Ken Worsley

Let’s start with a recent quote from Upper House LDP lawmaker Kotaro Tamura:

“We have no reasons not to launch [a sovereign wealth] fund. It will be a breakthrough in transforming Japan into a financial-sector oriented nation, as the fund will help draw money and talented professionals from overseas.”

There are no reasons not to launch an SWF? That can’t be true.

As we already know, the ruling Liberal Democratic Party has set up a panel to assess whether or not Japan should establish a sovereign wealth fund. As we mentioned a few days ago, this panel met for the first time on February 22, hopes to write a bill in April, submit that bill to the diet this fall, and have it enacted sometime early in 2009.

But not if the Ministry of Finance has anything to say about it. With the LDP already battling the opposition Democratic Party of Japan over the nomination of Toshiro Muto to the post of Bank of Japan Governor, one has to wonder when someone is going to come out on their side (that most likely won’t happen soon, as recent articles in the Economist and by Bloomberg’s William Pesek have begun to scratch the surface of showing the extent to which political ineptitude is choking the Japanese economy).

We’re not going to settle the issue of whether or not a sovereign wealth fund is a good idea for Japan in one simple post, so there’s no point in attempting such an exercise (it’s probably not a good idea, since it will simply get mismanaged anyway). But what is worth looking at is the resistance coming from the bureaucracy. One may say that they do not want to relinquish control over the nation’s foreign reserves - after all, the MOF worked so hard to earn that $1 trillion by issuing trillions of yen worth of sovereign debt.

Others may look at the issue as a potential thorn in the side of Japan’s relations with the US. Japan is the world’s largest holder of US Treasuries, and a change in foreign reserve management policy might not sit well with some folks.

There are a host of other good reasons why Japan should not set up a sovereign wealth fund right now, as there are a host of reasons why it should. But Finance Minister Fukushiro Nukaga summed it up pretty well in one short sentence last week:

“Sovereign wealth funds are operated by countries with a fiscal surplus.”

At this point, who cares if it’s not even true?

Filed Under Finance, Fiscal Policy, Ministry of Finance, Politics

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