By Takashi Nakamichi
Of DOW JONES NEWSWIRES
TOKYO (Dow Jones)--Japan's ruling party unveiled an economic stimulus plan Wednesday that calls for Japan to consider making use of its $1.07 trillion in foreign reserves to create a sovereign wealth fund.
In doing so, Japan would join other large foreign currency reserve countries such as the UAE, Russia and China, but would be the first G-7 economy to take such a step. A Japanese sovereign wealth fund has been contemplated in the past, but has always been rejected.
In explaining the reasons for such a move, the plan's chief architect, former trade minister Masayuki Naoshima pointed to the need to get a greater return on Japan's overseas investments. "We are thinking of how we can better employ Japan's foreign reserves," he told reporters late Wednesday.
The proposal is included in a more than Y4.8 trillion package put together by Naoshima and other lawmakers within the ruling Democratic Party of Japan. Other measures include employment support, regional infrastructure projects and steps to reduce the country's dependence on so-called rare earth metals imported mainly from China.
The stimulus is part of a concerted effort by the government and Bank of Japan to keep the economy from sinking back into recession. The government is also taking action to lower the value of the yen while the central bank Tuesday unveiled a ground-breaking program designed to pump more money into the economy.
Since the DPJ controls the lower house of the Diet, the more powerful chamber of Japan's parliament, the package is expected to be backed by the government. But the prospects for the fund remain doubtful due to a number of potential hurdles.
The most stringent opposition is expected to come from the powerful Ministry of Finance, which effectively killed off a similar proposal in 2008. The ministry is said to be concerned that any wealth fund-style investments would be too risky a use of taxpayers money.
The timing is also less than opportune since the funds would likely need to be diversified out of the dollar, at a time when Japan is trying to support the U.S. currency to hold back a rising yen that hurts exports. It has said that selling dollars would "destabilize" the currency market.
Naoshima said that selling U.S. Treasurys, where Japan currently puts the lion's share of its foreign investments, was not on the cards. "I am not thinking about selling U.S. Treasury bonds," he said.
He also said that the idea of a fund was in its early stages, saying "(we) need to discuss the issue with the government and especially with the Ministry of Finance, which we haven't been able to reach an agreement with."
Analysts also doubt that the government will do anything radical with the reserves. Shifting reserves away from the dollar could fuel its downtrend versus the yen, dealing a blow to an export-reliant economy already reeling from the yen's continued strength.
Osamu Takashima, chief currency strategist at Citigroup in Tokyo, said lawmakers were using the proposal to "show off" to voters that they are aware of the trend in which developing nations such as China use national wealth funds to earn higher returns on their reserves. "It's hard to imagine that the Japanese government will sell U.S. Treasury bonds," he said.
Another key part of the package is meant to reduce Japan's dependence on potentially problematic suppliers such as China for "rare earth" minerals and other natural resources.
Indications that China was unofficially blocking such exports after the two nations squared off in a territorial dispute had worried big Japanese manufacturers. The Chinese government denied limiting exports, but the episode highlighted the importance of the materials for products such as environmental technology where Japan is a major exporter.
The DPJ is also calling on the government to use the reserves of its state-affiliated Japan Bank for International Cooperation to make investments overseas to help Japan secure natural resources, the Nikkei newspaper reported on Wednesday.
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