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Japan’s pension fund lost 5.65 trilion yen in fiscal 2007

As a quick follow-up to yesterday’s post on the creation of a sovereign wealth fund and the taking of seed money from Japan’s pension fund, it was announced today that the Government Pension Investment Fund lost 5.65 trillion yen in fiscal 2007. Although estimates had been published before, this is the first time we’ve seen detailed numbers from the government.

As one would expect, the fund made money from its investments in domestic government bonds, but lost about 7.5 trillion yen in equities positions both at home and overseas. This was the largest loss ever incurred by the pension fund, which has been investing full-scale in financial markets since 2001.

LDP panel proposes soverign wealth fund setup for Japan

Things have been slightly quiet on the sovereign-wealth-fund-for-Japan front lately - a bill proposing an SWF for Japan was supposed to have been written in April - but today the issue finally made its way back into the news.

According to the Nikkei, an LDP panel has proposed taking 10 trillion yen out of the nation’s Government Pension Investment Fund (GPIF), which currently oversees about 150 trillion yen in assets. About two-thirds of this money is held in Japanese government bonds, while the rest is in overseas government bonds and both domestic and foreign equities.

The interesting part of the proposal is what follows. As the Nikkei puts it:

the LDP panel urged the government to set up a state-owned asset management firm that would manage about 10 trillion yen on behalf of the GPIF. The proportions of the different types of assets would remain unchanged, but the fund would be staffed by financial professionals, who would be authorized to invest more aggressively than the GPIF.

The proportions would remain unchanged? Why force an SWF to put about two-thirds of its funds into Japanese government bonds? Oh yeah, we know the answer to that one already. We do need to keep in mind that Japan’s pension fund lost money on its investments last year.

It seems as though the Ministry of Finance has successfully kept the government’s hands away from the nation’s foreign reserves. They’re going to deplete the pension reserves first…

On a side note, the Ministry of Finance has been bossing the government around to quite an extent recently, especially over budget items, including education-related expenditures (more details to follow soon) and cutting in wasteful spending at the Foreign Ministry (which should be done). Can Fukuda stand up to the MOF? Is this revenge for not getting through an MOF Old Boy as Governor of the Bank of Japan? It’s starting to look like Mr Abe being laid to waste by the Ministry of Health, Labor and Welfare all over again…

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

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?

The silver lining on the recent Nikkei downturn? Japan’s government eyes extending tax breaks; A sovereign wealth fund is proposed

Despite the opposition Democratic Party of Japan attempting to use gasoline, capital gains and dividend income taxes as political footballs early on in the Diet session, current economic conditions are allowing the ruling Liberal Democratic Party to usurp at least part of the DPJ’s thunder, even if doing so may hurt the nation’s tax base.

On Thursday, the Nikkei reported that a group of 58 LDP lawmakers, led by former Financial Services Minister Yuji Yamamoto, have made a proposal to extend temporary tax breaks on revenue earned from capital gains and dividends. Whether or not this will lead to compromise on the gasoline tax issue is open to speculation, but lower taxes are always a good thing in the eyes of investors.

Current tax on dividends and capital gains is set at 10 percent, though that figure is set to be eased back up to 20% by 2010. The LDP’s proposal would put off any scheduled increases in the taxes so long as the Nikkei remains under 18,000 points. We don’t see the point in such an arbitrary number (it corresponds approximately with the Nikkei’s high from last year), but this is more about politics than the economy.

Perhaps more interestingly, however, is that this proposal also calls for the setting up of a sovereign wealth fund. Although the battle over taxes between the LDP and DPJ promises to provide at least some excitement in the opening months of this year’s political season, a potential showdown between the government and the Ministry of Finance (which has thus far resisted efforts to make any ‘risky’ use of Japan’s foreign reserves) might prove far, far more entertaining.

Would it be possible that we see the sovereign wealth fund arm of the proposal dropped in exchange for extending the tax breaks?

Sovereign Fund Not Happening: ‘Official’ at the G7 Conference

We’ve been following the issue of whether or not Japan will decide to set up a sovereign wealth fund with some interest. Now that Japan’s foreign reserves have surged to an all-time record of $945 billion, we have speculated that pressure to launch such a fund would begin mounting.

A Reuters article from Saturday, however, quotes an unnamed ‘government official’ who spoke to reporters after the G7 meeting of finance ministers in Washington as saying:

For a country like Japan, which manages its economy based on market mechanisms, it is not desirable for the government to manage foreign assets and invest in various ways aggressively…It is important that our reserve management has a neutral impact on markets.

This is interesting phrasing, especially given its rise from the G7 meeting; previously, MOF officials had been saying that they would not risk the nation’s wealth by investing it aggressively. Now we hear that the prioritized risk is upsetting global markets (which is also a risk). Is there pressure on the outside telling Japan not to go through with creation of a sovereign wealth fund?

Catch 3.0% - Japan’s Consumption Tax, GDP Growth Projections and Interest Rates Coming to a Head

In an interview with the Nikkei on Wednesday, Kaoru Yosano, the Chairman of the ruling Liberal Democratic Party’s Fiscal Reform Panel, stated his belief that the government should lower its projection of 3% economic growth for fiscal 2007 through 2011. What’s so important about 3%?

At that level, the government believes it would secure enough funds through current tax structures to allow it to balance the national budget and not raise the consumption tax. Over the past few years, with pension obligations growing, it has become obvious that a raise in the consumption tax would have to be discussed at some point. Currently, one third of Japan’s pension fund obligations are derived from the consumption tax.

Nonetheless, we have seen successive prime ministers twist themselves into pretzels in order to avoid discussion of a tax hike. Koizumi had the least trouble; he was able to focus public attention on postal privatization and make it such a pivotal, polarizing issue that the consumption tax issue fell briefly by the wayside. Abe fared less well, instead blatantly ignoring discussion of the issue in the leadup to the Upper House election in July of this year: “We won’t not discuss the issue of consumption taxes at the appropriate time.”

The appropriate time was then.

Ignoring the issue did not help Abe in the Upper House election, in which his LDP looked like a solid high school football team going up against the New England Patriots, except the DPJ was actually the Miami Dolphins in stolen uniforms and should never have looked so good. Given how badly a consumption tax could hurt the LDP at the polls (not to mention the - ahem - economy), would it not make sense for Prime Minister Yasuo Fukuda to call a Lower House election this Fall, before a tax hike kicks in?

It gets better. Read more

Personnel Shakeups at the Ministry of Finance

At a press conference today, Finance Minister Koji Omi announced personnel shuffling plans for the Ministry of Finance, to take effect on July 10. First, vice finance minister for international affairs Hiroshi Watanabe will be retiring. Since becoming Japan’s currency boss in July 2004, the yen has steadily weakened, by about 12 percent against the dollar and 20 percent against the euro. Watanabe, however, has refrained from making any market interventions. This policy marked a sharp change from his predecessor, Zembei Mizoguchi, who sold about 35 million trillion yen in 2003 and early 2004.

Watanabe will be repleaced by Naoyuki Shinohara, who is currently the director general of Finance Ministry’s international bureau. His stance on currency issues is not expected to be a departure from that of Watanabe.

In addition, Vice Finance Minister Hideto Fujii, the ministry’s top bureaucrat, is set to be replaced by Hiroki Tsuda, who currently heads up the budget bureau.

There have been no indications in the media yet that Shinohara will take a different stance to currency management than Watanabe has, though NHK News tonight certainly devoted much time to the ‘issue’ of the weak yen and what that means for Japan’s economy - not something ordinarily in the news.

Almost entirely unrelated, but Shisaku’s blog had an excellent writeup on NHK’s coverage of Shinzo Abe’s first six months as Prime Minister.

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