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Japanese government seeks to ax innovation fund head

Battle over salary and independence derails dream of building sovereign wealth fund

JIC President Masaaki Tanaka, left, and Minister of Economy, Trade and Industry Hiroshige Seko were locking horns over the independence of the investment fund.    © Reuters

TOKYO -- Japan's longtime goal of establishing a sovereign wealth fund-like investment arm is on the brink of collapse, as the government locks horns with the very man it recruited to lead the endeavor.

Just five months after announcing that former international banker Masaaki Tanaka would be president of the newly revamped public-private innovation fund Japan Investment Corp., the Ministry of Economy, Trade and Industry is pressuring him to resign, due to the lack of trust.

Tanaka is known for his global experience and his wealth of contacts at home and abroad. He has previously served as vice president for Mitsubishi UFJ Financial Group, and headed a U.S. bank acquired by the group for a time.

He was tapped to lead JIC, which was created earlier this year through an overhaul of the Innovation Network Corp. of Japan, which had come under frequent criticism for focusing too much on rescuing troubled businesses and delving into corporate realignment efforts, rather than finding growth areas to invest in. 

The biggest change from the INCJ is that the new JIC is not required to seek input from the economy minister on its investment decisions, so it can remain more independent.

JIC's top brass is filled with investment-savvy individuals hand-picked by Tanaka, including Deputy President Yasunori Kaneko.

Signs of trouble first emerged over the high salaries of JIC executives. The ministry had previously promised to pay more than 100 million yen, or $880,000, to the top brass, but it took back the vow under public criticism. This comes at a time of increasing sensitivity to executive pay after Carlos Ghosn's arrest last month for dramatically underreporting his compensation.

Moreover, the extent of government involvement in the fund has always been a source of contention. "We created a structure that allows finance and investment professionals to act swiftly," Tanaka said back in September, in effect rejecting any say from the ministry.

That stance has not gone down well with the mandarins. "It's ridiculous how little input we have, considering the money comes from us," one government official said.

At a Nov. 24 meeting with Tanaka, the economy ministry demanded a greater say.

The bad blood between the two sides has now led to real action. Back in August, the ministry had requested 160 billion yen ($1.41 billion) in funding tied to JIC as part of its fiscal 2019 budget. The ministry is now considering rescinding its request for all the money that would have gone directly to the fund. 

It is also essentially cutting off the fund from 1.8 trillion yen in outside loans guaranteed by the government, which need to be approved by the agency as its supervising body.

"It is difficult for us to entrust government funds to JIC when our trust in Mr. Tanaka is broken," a ministry official said.

But such moves may not be enough to force Tanaka and other leaders to leave. "JIC has enough funds on its own, and can keep operating without the additional budget," a source familiar with the matter said.

The fund's directors met for about four hours on Nov. 27 to discuss the economy ministry's moves. Many of them, including outside directors, were critical of the body, fearing it could now walk back any commitment it makes in the future.

For now, there looks to be little expectation for compromise, and any hopes for a vigorous sovereign wealth fund look dim.

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