A Sovereign Wealth Fund for a Non-Oil Producing Country: The Case of Japan

A sovereign wealth fund (hereafter SWF) would be an effective tool for preserving Japan’s national wealth in the medium to long run under a declining, aging population and for coping with external shocks in the short run. Japan is a typical non-oil producing, developed country that relies significantly on international trade. Its energy dependency rate remains around 93%, and its food sufficiency rate is less than 40%. Despite its high dependence on foreign producers, Japan’s asset holdings are still distinctly biased toward domestic assets denominated in Yen. Indeed, nation-wide foreign equity holdings are approximately 30% in Japan, while those of the UK and Germany exceed 45%. The same pattern holds in the allocation of bonds. The relative foreign asset allocation of Japan remains lower than European levels in part because of the high volatility in exchange rates and the often observed, persistent appreciation of the Yen against the US dollar. Because of this exchange rate risk, international asset allocation is not optimal. After reviewing the economics of a SWF for non-oil producing countries, we propose that Japan establish a SWF as a means of preserving its wealth for future generations