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International Relations

Japan plans sovereign wealth fund to finance US infrastructure

Tokyo hopes proposal eases pressure at upcoming trade talks with Washington

Construction at a bridge across the Hudson River in New York. Japan's new sovereign wealth fund will help finance American projects.   © Reuters

TOKYO -- The Japanese government intends to create a sovereign wealth fund to invest in American infrastructure projects, improving economic relations with Washington while putting excess capital to better use.

The state-backed fund will support infrastructure construction along with resource development and storage, as well as invest in joint U.S.-Japanese projects in other countries. It could work with a $113 million Indo-Pacific investment initiative announced this week by U.S. Secretary of State Mike Pompeo.

Japan is expected to offer the fund as a concrete example of economic cooperation with the U.S. at the "free, fair and reciprocal" trade talks that the two sides will launch on Aug. 9. Washington will likely push for a bilateral free trade agreement at the talks, and additional tariffs on autos remain on the table. Japan hopes cooperation on the new fund will ease trade pressures. 

The fund meshes with Washington's goals, as shown by the $1.5 trillion infrastructure proposal announced by President Donald Trump early this year. That initiative could provide economic stimulus on the scale of the administration's tax overhaul, which lowers taxes by $1.5 trillion over a decade, but it also raises similar concerns about widening the U.S. budget deficit.

Tokyo will raise capital from the private sector through bond issues as early as fiscal 2019, while providing long-term, low-cost financing. Public-private funds may furnish loans as well. The size of the fund has yet to be determined. Japan's Cabinet Office will form a committee to discuss the proposal as early as this month.

The government also seeks more profitable use for Japan's glut of capital by pouring it into foreign currency assets. Profits on the fund's investments would accrue to future generations as well, potentially helping Japan fix its finances.

The infrastructure fund proposal calls for taking advantage of monetary policy. The Bank of Japan seeks to keep long-term interest rates around zero, but decided Tuesday to let them move within a wider band above and below that target. Though bond yields have been rising since then as traders test the limits of the central bank's tolerance, real rates may sink into negative territory in the longer term due to an economic downturn or other catalyst.

At that point, Tokyo plans to raise money for the fund by offering long-term debt with a yield of zero. It envisions issuing only as much as bid for by banks and individual investors.

The proposal also urges converting the procured money into foreign currency once the yen strengthens, citing appreciation beyond 100 to the greenback as a target for buying cheaper dollars. This move would help stabilize the Japanese currency in the face of sharp swings in a similar manner to direct intervention, but it could leave the government open to accusations of currency manipulation.

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