Japan Should Take Steps to Attract Sovereign Funds, Panel Says

Written on July 7, 2008

Japan should adopt measures aimed at attracting more of the almost $3 trillion managed by sovereign wealth funds, a trade ministry report said.

The nation must welcome state funds that “have no political purposes and invest for the long term,” said a document to be released today by a trade ministry advisory panel, a copy of which was obtained by Bloomberg News. Any measures should conform to guidelines being drawn up by the International Monetary Fund, the report said.

Japan, seeking to rebound from the first drop in stock ownership by foreigners in five years, is vying for the attention of state-run funds under pressure from the U.S. and Europe to increase transparency. Sony Corp. and Cosmo Oil Co. are among Japanese companies that received investments from sovereign funds in the past year.

“An increase in funds that will provide risk money bears significance,” said Naka Matsuzawa, chief strategist at Nomura Holdings Inc. in Tokyo.

Japan will demand state-run funds increase transparency in line with frameworks being developed by the IMF and the Organization for Economic Cooperation and Development, the report said. The nation won’t seek to develop its own set of codes, according to the document.

The report will be released today, according to a July 4 e- mail from the trade ministry. The e-mail didn’t give details.

Code of Conduct

Sovereign wealth funds may oversee more than $10 trillion seven years from now, up from $2.9 trillion now, according to the report. Concerns among some U.S. lawmakers that their investments are motivated by politics appear to be unfounded, it said.

“Japan needs to come up with measures in cooperation with the IMF and OECD to attract more sovereign wealth funds that will benefit the nation as a whole,” the report said. “Investments made by global sovereign wealth funds have caught international attention and Japan needs to examine them from various angles.”

In May, the IMF held a first meeting in the U.S. as part of plans to produce guidelines for state investment pools. A draft of the code will be ready in October, Mohsin Khan, IMF regional director for the Middle East and Central Asia, said May 12.

The working group includes representatives from several developed economies and the countries that run some of the largest investment funds, such as Norway, China, Kuwait, Russia and Singapore.

China’s New Fund

Sovereign wealth funds, state-sponsored pools from governments including the United Arab Emirates, 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.

Record oil prices have boosted revenue for Middle Eastern nations, Russia and Norway, swelling their coffers. Meanwhile, China’s runaway trade surplus pushed its foreign reserves higher, leading last year to the creation of the $200 billion China Investment Corp.

Much of this year’s investment by sovereign funds has been directed at global banks such as Citigroup Inc. and UBS AG that are battling to repair balance sheets savaged by writedowns on credit market holdings. Financial firms worldwide have raised $321 billion since U.S. mortgage defaults triggered a global credit crunch a year ago, data compiled by Bloomberg show.

Japan, meanwhile, is struggling to attract more funds into what European Union Trade Commissioner Peter Mandelson in April called the developed world’s “most closed” market.

Sony, Cosmo

Foreign direct investment in Japan was about 3 percent of gross domestic product at the end of 2007, according to the Cabinet Office. That compared with 45 percent in England, 14 percent in the U.S. and 8.8 percent in South Korea.

The government will review corporate taxes as part of a push to make Japan more competitive, according to a draft of its economic and fiscal policy released last month. Japan is seeking to boost foreign investment’s share of GDP to 5 percent by 2010.

Dubai International Capital LLC, the $13 billion fund manager whose investors include the emirate’s ruler, bought shares in Sony, the world’s second-largest consumer electronics maker, last year in its first investment in a Japanese company.

Abu Dhabi’s International Petroleum Investment Co. bought a more than 20 percent stake in Cosmo Oil Co., Japan’s fourth- largest refiner, in October for about 90 billion yen ($843 million). Government of Singapore Investment Corp. bought the Westin Tokyo hotel from Morgan Stanley in February.

The trade ministry joins the nation’s Financial Services Agency in making clear its wish to open up for sovereign funds. In February, Yoshimi Watanabe, Japan’s minister for financial services, said Japan would welcome investment by China’s CIC after meeting the head of the fund, Gao Xiqing.

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