By Ron Harui and Liza Lin
July 10 (Bloomberg) -- Japan should start a sovereign wealth fund with about $33 billion in assets, using interest earned on its $1 trillion of foreign reserves, said Takatoshi Ito, a member of a government advisory committee.
The fund would invest in higher-yielding assets overseas including equities, Ito said in a Bloomberg Television interview in Singapore. It needs to be set up ``as soon as possible'' to avoid exchange-rate fluctuations that may hurt the reserves, which are second only to those of China, he added.
Ito has scaled back his plan since suggesting a $700 billion fund a year ago because of opposition from the Ministry of Finance. Since then the value of the $592 billion that Japanese investors hold in U.S. Treasuries has been eroded by the dollar's 12 percent drop against the yen. Japan has also lagged behind China, which set up a fund to manage $200 billion of its $1.68 trillion of reserves in September.
``My proposal is to take interest income separate from foreign reserves, accumulate it and manage it more actively,'' said Ito, a member of Prime Minister Yasuo Fukuda's key economic panel. ``The reserves are very exposed to currency and interest- rate risks in the future, so this is not desirable.''
He estimates that the government receives interest payments of about 3.5 trillion yen ($33 billion) a year on the reserves, which are held in highly-liquid assets such as Treasuries.
Assets managed by sovereign wealth funds will triple to more than $10 trillion by 2015, International Financial Services London said in March.
Funds' Rising Influence
The funds invested $58 billion in the first quarter, more than they spent from 2000 to 2005, according to a report by Cambridge, Massachusetts-based Grail Research, a unit of consulting firm Monitor Group.
The funds' rising influence has caused U.S. and European lawmakers to call for greater transparency about their investments and motives. The U.S. Senate Banking Committee held a hearing last month on concerns that the funds may be buying stakes in American companies for political reasons. The European Commission in February called for an international accord to limit the political influence of the funds.
Finance Minister Fukushiro Nukaga said in March the ministry focuses on liquidity and safety in managing the reserves. His ministry has said the money should be used in case Japan needs to intervene in the currency markets.
`Huge Carry Trade'
The finance ministry is ``opposed to doing anything about foreign reserves,'' said Ito, who described the current investment strategy as ``basically a huge carry trade.''
In such trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the borrowing and lending rate. The risk is that currency market moves erase those profits. The benchmark interest rate is 0.5 percent in Japan, compared with 2 percent in the U.S., 8.25 percent in New Zealand and 12.25 percent in Brazil.
The yen has risen against 12 of the 16 most-active currencies in the past year as deepening credit-market losses prompted investors to cut carry trades. The currency traded at 106.83 per dollar as of 10:10 a.m. in Tokyo from 106.76 late in New York yesterday. It reached 95.76 on March 17, the strongest since Aug. 15, 1996.
To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Liza Lin in Singapore at llin15@bloomberg.net
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