Plans to set up a state-run investment company to manage Japan’s foreign exchange reserves are moving forward, a key economic adviser to Japanese prime minister Shinzo Abe said last night.
“Some people are advocating [such an agency] for Japan, and I am one of them”, Takatoshi Ito, one of a group of economic advisers to Japanese prime minister Shinzo Abe told Emerging Markets in an interview.
“Japan is accumulating reserves well beyond the size of what is required under regular circumstances to be held in liquid form,” he said.
Moves in Japan towards using an investment company to manage the reserves mirror similar discussions in Taiwan. Korea already has such an agency, and China is now setting one up.
The bodies will be modeled along the lines of Singapore’s state-run agency, Temasek, and the Singapore Government Investment Corporation (GIC).
All told, there are more than $3 trillion of reserves in Asia the management of which could be reviewed. The issue is very political in Japan, because of its close ties with the US and its reluctance to hint in any way at a significant shift of its reserves, which are nearly $1 trillion, out of US Treasury securities.
Korean finance minister Okyu Kwon told Emerging Markets in an interview yesterday that the country’s reserve management agency, the Korea Investment Corporation (KIC), should be fully operational by the end of this year and managing around $20 billion out of Korea’s $240 billion of official reserves.
“We need to increase the amount and diversify, not only for maintaining stability but also for profit,” he added.
George Chou, a deputy governor of Taiwan’s central bank, told parliament recently that the bank is evaluating foreign experience on managing the reserves via an investment company.
The shift to fund management comes amid international criticism that Asia’s reserve accumulation contributes to global financial imbalances. There are also calls in Asia for reserves to be used to fund domestic projects rather than to help fund US payments deficits or to bolster advanced capital markets.
Japan’s thinking on the issue is influenced by China’s decision to establish a reserve management agency, and also by Korea’s initiative, Ito, a member of the Cabinet-level Council on Economic and Fiscal Policy, said – although there is “no concrete plan yet”, he added. Japan’s deputy finance minister Hideto Fujii has also denied that there is any plan to establish a reserves management agency at this stage.
Ito suggested that Japan needs to take a view on the amount of funds that need to be segregated as official foreign exchange reserves, to cover possible future balance of payments or other contingencies
“Any difference between what is required and the actual amount of reserves could be diverted to another channel and be managed under a different philosophy,” he said.
If part of Japan’s reserves and interest were classified as an “investment fund”, professional fund managers can be retained to manage them. The money could then be used as a “reserve fund for future generations” or to cover various other national expenditures, Ito added.