Japan should sell 80 percent of FX reverses to cut risk

By Yoko Nishikawa

TOKYO (Reuters) - Japan should steadily sell off 80 percent of its foreign reserves rather than set up a sovereign wealth fund to actively manage this money, said a former government official who advised then-Prime Minister Junichiro Koizumi on economic policy.

Mitsuru Taniuchi, now a professor at Waseda University in Tokyo, said there was a growing risk of valuation losses due to currency moves because Japan's reserves are now the world's second-largest behind China at more than $1 trillion.

"It would be appropriate to gradually sell them, possibly over several years, while monitoring the market," the former director-general of the Cabinet Office's research bureau told Reuters in an interview.

"If we sold $800 billion quickly, it would of course disrupt the market."

Taniuchi said setting up a new investment body to more aggressively manage the international reserves was not the way to go despite calls from some ruling party lawmakers for the government to create such a sovereign wealth fund.

"It is not a job for the government. As Koizumi has said, what the private sector can do should be left to the private sector. That is the key concept for Japan's economy," he said.

Although China and Singapore have set up investment funds to more aggressively manage part of their foreign reserves, Japan should not simply follow suit, Taniuchi said.

China regulates capital flows and its controlled yuan market means Beijing cannot just sell foreign assets in the reserves without affecting the currency markets heavily, while similar sales would influence price levels greatly in Singapore as it is a small and open economy, he added.