Japan weighs sovereign fund for US infrastructure investments

Japan weighs sovereign fund for US infrastructure investments

Japan is considering launching a sovereign wealth fund for US infrastructure investments as it tries to fend off trade attacks from Donald Trump, according to people familiar with the plan.

Talks for the fund, which analysts estimate could start at $100bn, come to light ahead of Japan’s trade talks in Washington next week where it hopes to counter US pressures to enter bilateral trade talks even as it faces fears of being drawn into Mr Trump’s trade wars.

The original proposal for the creation of a Japanese sovereign wealth fund comes from one of Prime Minister Shinzo Abe’s most trusted economic advisers, Koichi Hamada, an academic known as one of the key architects of the “Abenomics” economic revival programme.

The idea was primarily envisioned as a long-term strategy to help offset Japan’s status as both short of natural resources and the world’s fastest-greying major economy. The fund would address the already obvious insufficiency of the social safety net, with more than 27 per cent of the country now aged over 65.

Mr Hamada and others argue that while Japan’s foreign asset position is the world’s largest, the overall balance is still strongly domestically weighted because so much of the private sector’s savings are held at home.

A sovereign wealth fund could help mitigate this by increasing savings, shifting assets abroad and dampening the tendency of the yen to surge on haven trades during global economic downturns.

The fund proposal, which appeared in an academic paper published last October, was written before the now heightened risk of a trade war: even those who did perceive a risk of US-China friction judged that Mr Abe had, partly via “golf course diplomacy”, built a strong enough rapport with Mr Trump to insulate Japan.

But government officials said that since March this year, when it became clear that Japan might not escape some US tariffs, the fund proposal rose higher on the agenda.

“I think it can now be considered as an active proposal that has been accelerated as Japan looks for ways to protect its auto industry and other exporters with ideas it thinks will get a positive reception in Washington,” said one person close to Japanese planning on trade issues.

On Friday, Taro Aso, the finance minister, confirmed that Japan and the US were holding discussions on infrastructure projects. But he denied the government currently had any concrete plans for the fund.

James Malcolm, Japan economist at UBS, said the fund’s plans were likely to move slowly and estimated that it would be “something in the order of $100bn” — a tenth the size of Norway’s oil fund.

“But it is still an audacious prospect that underscores the open-mindedness and ambition of this unique administration to beat deflation and put the country on a very different future growth trajectory,” he said in a note to investors on Friday.

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