As sovereign wealth funds ride to the rescue of ailing Western banks, Japan is considering investing some of its trillion-dollar currency reserves to help revitalise its own economy.
The debate about whether to shift public funds into riskier assets comes as Asia's largest economy wrestles with huge national debts and a shrinking population that is struggling to support a growing number of pensioners.
The architects of Japan's sovereign fund plan hope that it will reverse Tokyo's slow decline as an international financial centre, and perhaps even bring a return to the heyday of the late 1980s.
"After the bubble economy collapsed, Japan's financial sector became ultra-conservative," former financial services minister Yuji Yamamoto, who is spearheading the sovereign fund initiative, told AFP in an interview.
"If Japan could attract market players as competitive as those in Singapore, then I think the corporate culture of Japanese banks and securities firms will also have to change.
"Japan will never recover the global standards that it had before just by leaving everything up to Japan's mega-banks and investment banks," he said.
The plan is to lure star fund managers from overseas to manage the money, giving a boost to the financial services industry at a time when foreign investors are becoming increasingly disillusioned with Japan.
Supporters of the scheme hope that the presence of the major league fund managers will help to reinvigorate the Tokyo markets in the same way that Singapore has benefitted from the creation of its sovereign funds.
"If we continue to let the Tokyo market go down it will probably be too late to solve the problem," said Yukari Sato, a ruling party lawmaker and former economist with a US investment bank.
Japan's foreign exchange reserves -- which topped $1 trillion last month -- are the second largest in the world after those of China, whose sovereign fund has invested $3 billion in private equity firm Blackstone and $5 billion in Wall Street giant Morgan Stanley.
About 95 per cent of Japan's forex reserves are invested in US Treasuries, which are seen as a safe asset, and it would be hard to sell those without the approval of the US government, Yamamoto said.
But Japan also has $17 billion from interest and dividend income in the reserves which could be invested without selling any US government bonds, he said.
Some of Japan's $1.4 trillion in public pension funds may also be more actively managed to try to improve returns.
"We should seek full risk diversification. Right now public pension funds are basically being managed using Japanese government bonds with very low returns," said Sato.
The rise of sovereign wealth funds in Russia, Asia and the Middle East has led to concerns in some recipient countries about a lack of transparency.
The funds have already set their sights on Japan. Last year a Dubai fund bought a chunk of electronics icon Sony Corp., and just last month a Singapore-controlled fund snapped up the Tokyo Westin hotel.
A Japanese sovereign fund could potentially have a huge impact on global financial markets, but experts say there are many obstacles to its creation.
Japan's huge forex stash is the result of years of currency intervention by the government to keep the yen down against the dollar and help its companies compete with international rivals.
If Japan dumps even some of its dollar holdings, the ailing greenback could plunge even further, hurting Japan's exporters and threatening the gradual recovery of its economy from recession in the 1990s, experts warned.
"There have been big fights with the US about this intervention," said Martin Schulz, an economist at the Fujitsu Research Institute.
He said if Japan now started to invest the funds, it would feel the political heat from Washington and risk driving down the dollar.
Last week the greenback slumped to an eight-year low in the 101-yen range.
If the dollar falls below the symbolic 100-yen level, "there will be strong discussions about intervention again," said Schulz.
"If one hand is buying dollars against yen and the other hand starts to sell dollars for international investments you have the opposite effect on the exchange rate," he said.
Indeed, the powerful finance ministry, which oversees the forex reserves, has shown little enthusiasm for a sovereign fund.
Finance Minister Fukushiro Nukaga has suggested that the risks might be too high.
Even if the fund is set up, there are doubts about whether the finance ministry would allow foreign brokers to run the show.
"It might happen elsewhere like in the Middle East but not in Japan. You would have bureaucrats sitting there," said Schulz. (AFP)
Japan mulls SWF to boost markets