Surge of government-backed investment funds squeezing out private sector

A number of government-backed funds to invest in private-sector projects such as promoting Japanese pop culture overseas and encouraging the construction of public facilities will begin this fall.

But some have criticized the ballooning government investments for having an unfair advantage over private sector sources of funding. Others said they may end up being a burden on taxpayers.

Three new funds will be introduced as early as this fall to bolster the growth strategy in the Abe administration's economic policies, known as "Abenomics." The total amount available to the nine main government-backed funds will exceed 4 trillion yen.

The Ministry of Economy, Trade and Industry (METI) will establish the Cool Japan promotion organization this fall to administer a fund that will facilitate the overseas growth of Japanese anime, music and other entertainment. The goal is to spread Japanese pop culture to the rest of the world.

South Korea invests eight times as much money as Japan to promote its domestic entertainment industry abroad, and Korean dramas have reached larger audiences in emerging economies than Japanese dramas.

"It is essential that we financially back the overseas spread of Japanese entertainment content," said Hideaki Ibuki, director of METI's Creative Industries Division.

The Cool Japan promotion organization's fund will have up to 60 billion yen at its disposal, which it is expected to invest in overseas projects such as Japanese TV channels and shopping malls selling Japanese goods.

Although it will not be a permanent institution, the government plans to keep the organization in place for 20 years, meaning that a return on the investment is unlikely to come anytime soon.

The Cabinet Office will also set up the private finance initiative promotion organization, which uses private-sector money to encourage the construction and administration of public facilities.

The Ministry of Education, Culture, Sports, Science and Technology is preparing the public-private innovation program, which invests in ventures started by institutes of higher education such as the University of Tokyo and Kyoto University.

Together, these three funds will have financial resources totaling 500 billion yen ($5 billion).

In response to the Abe administration's emergency economic measures in January, the Ministry of Agriculture, Forestry and Fisheries expanded the scope of an organization called the Agriculture, Forestry and Fisheries Fund Corporation for Innovation, Value-Chain and Expansion Japan.

The fund will seek to facilitate the export of primary goods through partnerships between businesses in different industries. This, and other action by the farm ministry, have already led to the creation of three funds this year, with a combined value of 500 billion yen.

The money for a government-backed fund is borrowed from sources such as the special account for fiscal investment and loans that earns dividends from NTT or Japan Tobacco stock, or lent via state-backed loans from private-sector financial institutions.

When combined with other existing funds such as the Innovation Network Corporation of Japan, the financial resources of the nine main government-backed funds will total more than 4 trillion yen.

TAXPAYERS MAY COVER LOSSES

Yet while these funds enter the investment business with loads of cash, private investment funds, with combined resources amounting to less than 1 trillion yen, are no match for them.

Therefore the Japan Private Equity Association, an organization created by private-sector funds, says that government-backed funds need clarified investment standards so that they do not end up "squeezing out private companies."

For government agencies, these funds allow them to secure large amounts of money without revealing specific information such as what companies they are investing in.

Bureaucrats might use the funds as new organizations to provide jobs to retired civil servants, a practice known as "amakudari."

If these investments do not yield a return, however, then they may become irrecoverable. A fund could recover the money it invested through a public offering of stock or by selling it to another firm, but the government's investment record in the past indicates that producing results has been difficult.

The Japan Key Technology Center, created in fiscal 1985 by organizations including the Ministry of International Trade and Industry, joined with private companies to invest 400 billion yen in bio-tech firms and other enterprises, but in return it only earned 3 billion yen from patent-generated revenue.

At the suggestion of the Board of Audit of Japan, the center wrote off a taxpayer-funded investment of more than 200 billion yen.

"Creating an organization serves the interest of government agencies," said former METI official Shigeaki Koga, who was involved in establishing the now-defunct Industrial Revitalization Corporation of Japan that helped restructure giant supermarket chain Daiei Inc.

"It gives the agency more posts where they can transfer middle-aged or older bureaucrats and hiring opportunities for amakudari."

The Organization for Small & Medium Enterprises and Regional Innovation, founded in 2004, for example, has two amakudari and 32 workers on loan from the METI and elsewhere.

"There is a surge of new government-backed funds, and their investments could become irrecoverable," admitted Deputy Chief Cabinet Secretary Hiroshige Seko, who chairs the Cabinet's advisory panel on government-backed investment funds.