BREAKINGVIEWS-Japan-US trade talks stray into fantasy finance

By Una Galani

TOKYO, May 30 (Reuters Breakingviews) - Masayoshi Son is championing the creation of a $300 billion U.S.-Japan sovereign wealth fund to invest in American infrastructure. It is an effort to bring the countries closer at a time when Washington’s trade war threatens to pull them apart. The scheme is attention-grabbing in the SoftBank 9984.T founder’s typical style, but it is almost certainly a bad idea.

A similar proposal did the rounds in 2018 during U.S. President Donald Trump’s first trade war. The current iteration has lots of details to work out, a person familiar with the situation told Breakingviews. Any plan also would need the support of both governments. So far, Japan's Finance Minister Katsunobu Kato says his ministry is not aware of the specifics of such a plan.

That may soon change. The centrepiece of the proposal Son is floating involves turning the U.S. and Japan into fee-earning general partners. It would utilise a slice of Japan’s $1.3 trillion of foreign currency reserves. Limited partners would include retail and institutional investors.

With $300 billion of equity leveraged up by a factor of 10, the fund could have firepower of $3 trillion, nearly 10% of U.S. GDP. The fund's focus would be on backing Japanese companies that build infrastructure and heavy machinery the U.S. needs, such as icebreaker ships that operate in the Arctic Circle.

Such a structure might persuade Trump to remove the 24% tariff on the $150 billion of Japanese goods exported to the U.S. each year. But it might crowd out existing foreign direct investment into the world's largest economy. Japan is the biggest overseas investor in the United States, with net foreign direct investment hitting an all-time high of 11.73 trillion yen ($77.3 billion) in 2024 on an investment stock of nearly $800 billion.

If Japan commits serious money, there's also the risk that Trump could rip up the agreement just as he has shredded previous trade commitments, including a verbal vow in 2019 that Japan would not be hit by U.S. auto levies.

Meanwhile, Son’s poor track record of delivering for sovereign funds is another red flag. The Japanese tycoon convinced Saudi Arabia’s Public Investment Fund and Abu Dhabi’s Mubadala to commit billions of dollars as co-investors in technology companies worldwide. Yet his SoftBank Vision Fund 1 has generated an internal rate of return as low as 4% since inception in 2017. Japan can earn similar yields, with much less risk and hassle, by investing in U.S. government bonds.

Ultimately, the scheme may appeal to Trump’s desire for the U.S. to “build the greatest sovereign wealth fund of them all”. Yet such investment vehicles born as vanity projects are vulnerable to corruption or to becoming honey pots for the rich and powerful: 1Malaysia Development Berhad and Abu Dhabi’s International Petroleum Investment Company, later acquired by Mubadala, are case studies of what can go wrong.

That the prospect of a U.S.-Japan fund is being floated again highlights the damage the global trade war will do to the Asian economy, and the need to put a new floor on bilateral ties. Yet a scheme so risky feels like fantasy finance.

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CONTEXT

SoftBank founder Masayoshi Son has floated the idea of creating a joint U.S.-Japan sovereign wealth fund to invest in infrastructure across the world's largest economy, the Financial Times reported on May 25.

The idea has been raised at very high political levels in Washington and Tokyo, according to three people close to the situation, and has been proposed by Masayoshi Son’s team as a template for other governments to forge closer investment ties with the U.S.