Saturday, October 25, 2008

President Sarkozy and Group of LDP Backbenchers Both Want Sovereign Wealth Funds. So What, You Ask?

So what indeed. The President of France pushes sovereign wealth funds to “protect” European businesses, while a proposal for a Japanese SWF from a group of LDP backbenchers follows the gyrations of the financial markets. Lesson?—the French will be French, while Japan won’t be seeing an SWF any time soon? I’m not quite sure; you tell me:
President Sarkozy on January 8 proposing to use the state-owned Caisse des Depots et Consignations, which manages state pensions, to “protect” French businesses from sovereign wealth funds and private speculators:
"There is no question of France remaining unable to react in the face of a rise in the power of extremely aggressive sovereign funds which only follow economic logic," Sarkozy said.

"France must protect its companies and give them the means to develop and defend themselves. I want the CDC to be the instrument of this policy of defending and promoting the essential economic interests of the nation," he added.
Note his use of the terms “economic logic” and “economic interests”.
[A]n aide to Sarkozy…denied that Sarkozy wanted to set up France's own sovereign wealth fund or wrest the CDC away from parliament, whose powers Sarkozy has actually promised to strengthen.
Mr. Sarkozy on October 21 calling on EU members to set up SWFs to keep European businesses in European hands:
“Stock markets are at a historically low level. There could be an opportunity to create our own sovereign wealth funds, which would make it possible to defend national interests and European interests,” Mr Sarkozy said in remarks at the European Parliament.
Here’s Mr. Sarkozy on October 24, announcing plans for a French SWF using CDC money:
President Nicolas Sarkozy on Thursday said France would set up a new “strategic investment fund” to stop French companies from falling into the hands of foreign “predators”.
Let’s turn to Japan. Here’s a July 3 report on a LDP project team, which came up with a plan to set up a Japanese SWF using 10 trillion out of the 150 trillion yen held in public pension funds. There was less here than meets the eye. According to the proposal, the SWF would continue to be subjected to the same 2 to 1 split between domestic bonds and other assets as the rest of the funds and would share the same 3.2% annual return target for a five-year trial period. An earlier report had Kotaro Tamura, the executive director of the PT (Yuzo Yamamoto, a former Financial Services Minister, chaired the PT), pushing for an 8.5% target. The text of the proposal is nowhere to be found on the Internet.

Fast forward to October and the U.S. stock market meltdown, when Mr. Tamura attracted foreign media attention, this time with the idea of using an SWF to buy up distressed assets in the United States and Europe.
"We should send the signal that we are ready to save the world with this money," he said in an interview.

Tamura leads a group of 65 lawmakers from the ruling Liberal Democratic Party who have proposed to Prime Minister Taro Aso that Japan treat the global financial meltdown "as a huge opportunity for us."

They are urging the government to inject some of its abundant cash into troubled U.S. and European banks, in return for equity, and to purchase distressed corporate assets at fire-sale prices.
I have yet to find a domestic news source regarding the 65 lawmaker group and its relation to the LDP PT, but let’s take the English-language news reports on faith. In any case, Mr. Tamura had to change his tune when the Japanese equity market collapsed:
What we should do is to buy stock and real estate with government assets…If the government and BOJ can’t act, there is no alternative but to close down the Tokyo Stock Exchange.
Who knows, we may wake up tomorrow to find that the Japanese government buying up Japanese stock, real estate, and real estate-based securities. But something tells me Mr. Tamura’s political pull falls short of his ambitions; helping regional banks stay afloat appears to be about as far as the Aso administration is going to go as far as propping up banks and non-banks are concerned. Beyond that, bailing out major financial institutions (unnecessary, knock on wood) or real estate businesses (undesirable) is a step that the Aso administration or any other administration for that matter will not be able to take without potentially fatal political repercussions.

I can see how the English-language media needed the Japanese buzz. As for the EU following Mr. Sarkozy’s lead…I’ll believe it when I see it.


Ross said...

I have been asked several times about Mr. Tamura and the probability that Japan would create an active, risk-taking SWF. My take all along is that nothing will come of it. American's hear words from Japanese and then speculate with seemingly no thought about the relative pull of the individual making the comments. Many seemed to think Takenaka could become PM. Or Koike. Silly really. Just like those who think Palin could be the GOP nominee four years from now.

That said, Japan's govt pension system already has diversified investments in foreign equities which essentially means that Japan has a SWF. Of course those funds are indexed and so relatively passively managed, at least as far as the firms go, so it doesn't raise any eyebrows.

Jun Okumura said...

We see that happen all the time, don’t we, with the bilingual interlocutory class, this blog not excepted? Sarah Palin is a somewhat different case. John McCain bought a pig in a poke, but the cat got out of the bag, and the trick has been quickly exposed. Where cross-cultural transmission is involved, it takes more time to expose us. But Ms. Palin does seem to be quick study where the political game is concerned, if not statecraft, and it is a natural progression (regression?) from Reagan to Bush Sr. to Bush Jr. to Palin. Given her national exposure and her appeal to the core right, I think she has a very good chance to be one of the Republican leaders—if the Democrats under a President Obama manage to consolidate an across-the-board victory and dominate the middle ground (a big if).

Every national pension system is at least potentially an SWF. But you’re right; in a country like Japan, where even hedge funds outsource foreign-market risks by putting their money into funds of funds, there is little appetite for the kind of asset management that we have come to associate with the term sovereign wealth fund. It’s notable that in Japan, the serious talk about injection of public money is revolving around beefing up local banks and buying up bank-owned (domestic) shares.