Japan Should Create 10 Trillion Yen Fund, LDP Says

By Keiko Ujikane and Komaki Ito

July 3 (Bloomberg) -- Japan should create a sovereign wealth fund with 10 trillion yen ($94 billion) in assets using money drawn from the nation's pension reserves to boost returns, a ruling Liberal Democratic Party panel said.

The LDP group will submit its proposal to Prime Minister Yasuo Fukuda ``as soon as possible,'' panel head and former Financial Services Minister Yuji Yamamoto said in Tokyo today.

``It's necessary to seek higher returns as much as possible, given the aging population and the falling birthrate, along with the looming risk of inflation,'' the panel said in a statement.

Countries from Norway to China have set up state funds to help their national wealth expand. Assets managed by sovereign wealth funds will triple to more than $10 trillion by 2015, boosted by foreign-exchange reserves and rising commodity exports, International Financial Services London said in March.

The LDP panel was formed this year to discuss the feasibility of creating such a fund to manage about 4 trillion yen of interest and profits earned from Japan's foreign reserves, as well as pension reserves. The pension fund may have lost money for the first time in five years last fiscal year.

The state fund should seek higher returns than the 3.2 percent made by the Government Pension Investment Fund, which manages a majority of the nation's 150 trillion yen pension reserves, the panel said.

Professionals

The new company should start with about 30 staff members, including fund managers and financial market professionals, without restrictions on nationality, the panel said.

``We are seeking to create an organization of investment professionals,'' Yamamoto said.

The state fund should allocate 67 percent of its assets to Japanese bonds and the rest for riskier assets such as stocks, overseas securities, and other derivative instruments, the panel said.

The Government Pension Investment Fund had 92.8 trillion yen in assets under management as of the end of 2007. The investment posted a loss of 792.4 billion yen in the nine months ended Dec. 31, according to its Web site.

The LDP panel isn't the only group that's urging the nation to find a way to improve the returns on public pension money.

Japan should set up ``baby funds'' by splitting the pension reserves to boost returns and diversify the number of assets it invests in, private-sector members of a government advisory panel said in May.

Take Responsibility

Welfare Minister Yoichi Masuzoe in May said the government needs to consider who would take responsibility should the pension fund post losses, backing away from supporting the idea to invest in riskier assets. Masuzoe had said in March that investing a third of the pension reserves in higher-yielding assets could be one way to boost returns.

In June, Takahiro Kawase, president of the Government Pension Investment Fund, opposed the idea of using pension money to create a state fund, saying it would force risks upon the general public.

The government also should review ways to invest foreign- exchange reserves and have discussions with the U.S. Treasury as Japan's reserves are largely invested in U.S. government debt, the panel said. In the long-run, the nation should aim to create a fund using interest and profits earned from foreign reserves, Yamamoto said.

Foreign Reserves

Japan's Finance Ministry has rejected the idea of using the nation's foreign reserves to create a state fund on the grounds that the reserves must be preserved to buy or sell yen.

Japan holds $997 billion of foreign reserves, the world's largest after those of China, which set up a state fund last year to manage part of its record $1.7 trillion of reserves.

To contact the reporters on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.netKomaki Ito in Tokyo at kito@bloomberg.net.