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Japan’s foreign reserves fall in April; Should 80% be sold off?

Earlier today, the Ministry of Finance announced that the value of Japan’s foreign reserves had fallen for the first time in eleven months in April, from $1.02 trillion in March to $1.0 trillion. Japan’s foreign reserve yields suffered the negative impact of declining euro and dollar values in April.

Last week, Waseda University professor and former Koizumi advisor Mitsuru Taniuchi attracted some attention by saying that instead of setting up a sovereign wealth fund, Japan should slowly sell off 80% of its foreign reserves. Taniuchi made the point that while selling off $800 billion quickly would be a bad idea, Japan’s current reserve levels leave it quite open to currency valuation risk - which the April figures show loud and clear, though one bad month out of twelve is hardly result worth causing panic.

Taniuchi said it best when he declared:

[Managing a sovereign wealth fund] is not a job for the government. As Koizumi has said, what the private sector can do should be left to the private sector. That is the key concept for Japan’s economy.

Hopefully he moves on to the pension fund soon…

Japan’s foreign reserves pass the $1 trillion mark; Sovereign wealth fund?

Earlier today, the Ministry of Finance announced that the value of Japan’s foreign reserve holdings had increased for the ninth straight month in February, and had exceeded $1 trillion for the first time. Holdings increased by $11.94 billion, hitting a total of $1.01 trillion. February was the eighth straight month in which foreign reserves hit an all-time high.

The nation’s foreign currency reserves stood at $979.2 million as of February 29, with $856.8 million of that in securities. $23.90 billion was reported in gold holdings, up by about $1.2 billion from a month ago.

Over the past 15 months, the Ministry of Finance has used about 35 trillion yen, mainly to buy US Treasury securities in an attempt to stem the decline of the value of the dollar. Japan is the world’s largest holder of US Treasuries.

The obvious question now is whether the passing of the $1 trillion mark will lead to increased calls for Japan to shift from its current system of holdings to a strategy that includes a sovereign wealth fund. Bloomberg quotes Masamichi Adachi, an economist at JPMorgan Securities in Tokyo, as saying:

A trillion dollars is a big number, so people are likely to think the government should put that money to better use. Unlike in China, the Middle East or Singapore, Japan’s foreign reserves are backed by debt, so the risks involved in a sovereign wealth fund would be much greater.

However, even if the sovereign wealth fund path is chosen, it’s not going to happen for some time yet. The ruling Liberal Democratic Party set up a panel to discuss the possibility of establishing such a fund last month, and it met for the first time on February 22. It’s goal is to write a bill in April, submit it to the diet this fall, and have it enacted sometime early in 2009.

Arguments for a sovereign wealth fund are plenty, Read more

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

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. Read more

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. Read more

Japan’s foreign reserves at $970 billion, for fifth straight all-time high

On Friday, the Ministry of Finance reported that as of November 30, the value of Japan’s foreign reserves had hit $970 billion, which is yet another all-time high. This is the sixth consecutive monthly increase, and the fifth consecutive all-time high.

Since the end of October, Japan’s reserves have gained $15.7 billion in value, primarily driven by returns in US Treasury bonds. Japan also saw gains in its euro-denominated holdings as the euro rose in value against the dollar.

According to the ministry, Japan held $820.86 billion in foreign securities as of November 30, which was up from $804.84 billion at the end of October. Japan also holds $125.23 billion in foreign currency deposits, $19.28 billion in gold, and $1.40 billion in International Monetary Fund reserve positions.

Japan’s foreign reserves rise for fifth straight month to all-time high in October

On Wednesday, the Ministry of Finance released its foreign reserve data for October, and the nation’s reserve funds have hit an all-time high for the fourth consecutive month, climbing from $945.60 billion in September to $954.48 billion by the end of October.

Japan remains their world’s second largest holder of foreign reserves, trailing only China. China holds about $1.412 trillion. Russia is at third with $407.83 billion.

On the same day, the Ministry of Finance also announced that in fiscal 2006, its foreign currency assets yielded 6.7%, which was almost four times greater than the yield shown in FY2005.

There are some who say the ministry should be diversifying away from its reliance on US Treasury bonds in order to create higher yields for government coffers, but ministry officials remain steadfastly opposed to such a move in their public comments.

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?

Japan’s foreign reserves hit an all-time high again; still no talk of a soverign fund

After hitting an all-time high of $932.157 billion at the end of August, Japan’s foreign reserves have broken the record for the fourth consecutive month, hitting $945.601 billion at the end of September. This was the fourth straight month with a rise in the value of the nation’s foreign reserves.

This was announced last Friday, but we needed some time to look at it all. With China launching its $200 billion China Investment Corp (GIC) on September 28, we expected to see some more talk of Japan considering launching a sovereign fund. If not talk, then gossip. Or, if not gossip, at least some sniping in the media. But there has been nothing, and we have nothing to report except that the value of Japan’s foreign reserves continues to rise, and that the Ministry of Finance still seems less risk-averse than the scheduling committee at a Big-10 football school (I picked that one out of a hat. I won’t mention which school I have in mind, though it starts with an “O” and Barry Sanders didn’t go there).

We’ll have our eyes peeled for news over the coming weeks, though real discussion may not happen until the $1 trillion line is crossed - next June?

Japan’s Foreign Reserves at all-time High of $932.2 billion in August

On Friday, the Ministry of Finance announced that Japan’s foreign reserves hit an all-time high of $932.157 at the end of August. This figure was up from $923.718 billion at the end of July, and showed a rise for the third consecutive month. The all-time high was broken for the second month in a row.

Speaking at a news conference after the announcement, new Chief Cabinet Secretary Kaoru Yosano told reporters:

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…it is necessary to move gradually while paying attention to the stability of global currency markets.

These comments come in stark contrast with the bullish attitude of his predecessor, Yasuhisa Shiozaki, who pushed for the Ministry of Finance to invest the nation’s reserves in a way that might generate greater returns. Shiozaki met opposition from the ministry itself, and with Yosano in the Cabinet Office’s driver’s seat, it looks as if the pressure may be off the ministry.

Yosano, as we’ve mentioned before, is not afraid to advocate raising funds by hiking taxes. Good luck with that in this political climate…

New Finance Minister Fukushiro Nukaga Has an Itchy Trigger Finger for Defense - Will he Pull it out in Defense of the Weak Yen?

In Monday’s Cabinet shakeup, Finance Minister Koji Omi was replaced by Fukushiro Nukaga, a Waseda University graduate (for those of us who care) and longtime LDP member of the Lower House. Back in 1998, Nukaga served as head of the Japan Defense Agency, though he resigned from that post due to a political scandal. In 2000, then Prime Minister Yoshiro Mori named Nukaga as Minister of State in charge of economic and fiscal policy, though he resigned from that post due to another scandal involving political fund contributions. From October 2005 to September 2006, he served once again as head of the Japan Defense Agency under Prime Minister Koizumi, and left the post when Mr Koizumi’s term as party president expired.

Nukaga has also served as Chairman of the Standing Committee on Finance in the Lower House, as well as twice having held the post of Deputy Chief Cabinet Secretary.

In a January 2006 speech at the Royal United Services Institute for Defence and Security Studies, then Defense Agency Chief Nukaga told his audience:

Japan will develop multi-functional, flexible and effective defense forces in order to cope with new threats and diverse contingencies and to participate proactively in international peace cooperation activities. New threats cannot be effectively dealt with under the traditional concept of deterrence as during the Cold War. Therefore, a transformation of defense forces from deterrence-oriented to response-oriented forces should be further pursued.

Turning to his current post. We know that Japan has not intervened directly in global currency markets since the spring of 2004. In a press appearance on Thursday, Nukaga told reporters, “We must make efforts to avoid drastic changes of foreign-exchange rates to ensure that the economy maintains sustainable growth.”

While that may hint at a possible departure from the path of his predecessor (though do no more than just hint), one thing remains consistent with former Finance Minister Omi’s line of thinking. Nukaga, like his predecessor, seems opposed to the idea of using some part of Japan’s massive foreign reserves as an investment vehicle. At the same press conference on Thursday, he also told reporters:

The priority of foreign-reserve management is to ensure the stability of currencies. We must carefully think before making risky investments.

That, of course, is a carefully worded way to not say yes or no, which is what we should expect from Mr Nukaga until at least his first meeting as a member of the Council on Economic and Fiscal Policy, which is still listed as ‘to be determined’ on their website…

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