Author: Peter Drysdale

The Economist reports this week the inevitable might indeed be nigh. Reform is on the way in the management of Japan’s giant publically managed pension fund. Last year the fund lost Yen 5.65 trillion or US$48 billion. The Japan pension fund is the world’s largest. Yen 150 trillion of its assets are parked in low yield Japanese government bonds or squandered on political toys and, unlike public pension schemes in other countries, provide inadequate insurance against future payments to Japan’s rapidly ageing population.

Old kids on the block (Economist)

As the Economist says, ‘Without better returns, the government will have to reduce its support for the old or raise taxes; neither will be popular. To improve the fund’s performance, a group of politicians from the ruling Liberal Democratic Party (LDP) has called for a sliver of the pension purse, ¥10 trillion, to be set aside to create a sovereign-wealth fund. It would be run by professional managers, not necessarily from Japan, rewarded with performance-based salaries. The fund would be independent of bureaucratic and political meddling. Its working language would be English.’

This move has many implications for the management of the Japanese economy and wealth, as it does for international capital markets, including Australia’s. In Japan, the move would begin change in the financial structure and the imperatives of macro-economic management. It would lead the way in breaching Japan’s cosseted bond market and forcing its integration into the international financial market. Public pension funds have been one (and only one) source of borrowing for preferred use by Japanese government agencies, and thus are protected from competition in international markets. Abroad, the sovereign wealth fund would open up these and potentially other Japanese assets that are currently confined to placement in Japan to investment in an extensive international portfolio.

As the Australian government continues to dither about sovereign wealth fund investment from China, the prospect of significant Japanese sovereign wealth fund play in the market for equity might at least also put a discipline on silly policy responses that are likely to limit Australian access to international capital when it will be sorely needed to respond to the expansion of investment that is needed to capture the opportunities from growth in our region.

Related articles:

1. Managing China’s treasure trove – Singapore Style
2. Time to re-think the economic partnership with Japan in Asia
3. India’s deepening relations with Japan

1. US gives a long overdue nod to Indonesia
2. An important international climate change funding proposal from China
3. Indonesian anti-corruption efforts enter minefields

This entry was posted on Tuesday, July 29th, 2008 at 11:36 pm and is filed under Investment. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.