LDP team seeks pension-funded SWF 

A project team of the ruling Liberal Democratic Party called Thursday for establishing a ¥10 trillion sovereign wealth fund, using the nation's ¥150 trillion pension fund, to secure higher returns and increase pension payments.

The group, led by former financial services minister Yuji Yamamoto, presented a blueprint for the Japanese SWF and maintained that professional asset managers should be hired by the fund, which would be a government-owned company. The team also said the entity should disband in five years if it fails to produce the expected results.

The project team intends to present the outline to Prime Minister Yasuo Fukuda soon and expects to submit a bill to launch the SWF to the extraordinary Diet session in the fall, Yamamoto said.

The final version of the team's proposal represents a slight setback as it failed to include the country's roughly $1 trillion in foreign reserves as possible resources for the SWF.

The team noted that since most of Japan's foreign reserves consist of U.S. Treasuries, any change in the portfolio could affect ties between Japan and the United States. It urged the Finance Ministry to discuss the matter closely with the U.S. Treasury Department.

According to the blueprint, the pension-based SWF will employ about 10 professional fund managers — either Japanese or from overseas — and 20 other staff with their salaries covered by annual expenditures up to ¥2 billion.

The fund will be politically independent and governed by a board of directors who will not engage in actual investment activities. The Cabinet will not assume any responsibility for possible losses resulting from the fund's investments.

Yamamoto said the organization will stay independent from the government, including from the Bank of Japan and the Fair Trade Commission.

Fund managers will engage in five-year investment activities, with exactly the same portfolio as the Government Pension Investment Fund, the current pension management body.

The pension fund now faces many restrictions, including pressure to cut salaries for fund managers and a low-risk investment policy imposed by the government because of its massive size.

The envisioned SWF will allocate 67 percent of its assets to domestic bonds and the remaining 33 percent to stocks and other assets, as does the pension fund. It will seek annual investment returns of 3.2 percent, the same as the pension fund, but team members were confident the SWF would achieve even higher returns.

"We will launch a professional organization. If the Government Pension Investment Fund is compared with a team of high school baseball players, the new body will be a group of major league players," Yamamoto said.

"It will be difficult to win the understanding of Japanese people on the launch of the SWF, because some might think it is like putting taxpayers' money into casinos," the former financial services minister said.

"But what will happen if we do nothing? The total national assets will sharply decline" as inflation will likely gain momentum in the future, he said.

The team said that even if the ¥10 trillion fund suffers major losses, it will not negatively impact pension payments for the time being due to the low-risk management of the remaining ¥140 trillion.

The group also said details of the fund's investment activities should not be disclosed to the public within the five-year period to avoid any backlash from short-term results and to secure long-term gains.

The average annual investment returns of Japan's pension fund management body are far smaller than those of similar funds in other countries. The returns were 6.9 percent in Norway, 7.5 percent in Sweden and 10.4 percent in Canada between fiscal 2002 and fiscal 2006.