Proposals to throw part of Japan's trillion-dollar cash pile into securing overseas natural resources raises the stakes in a global battle for strategic assets and the power that comes with them. If the world's second-biggest hoarder of foreign currency reserves were to use chunks of that money to buy scarce global commodities, it could propel resource prices skyward, stoke world inflation and lead countries to put up more barriers to such capital.

In a surprising announcement last week, Japan's ruling Democratic Party proposed taking advantage of a strong yen to invest in overseas resource development, including rare earth minerals vital for the electronics industry.

It also proposed setting up a sovereign wealth fund similar to funds in China and Singapore.

If it were established, Japan would become the first developed economy to throw hundreds of billions of dollars of currency reserves into strategic ventures, a practice led by fast-growing emerging economies such as China and Qatar.

Developing countries' massive investment in resources and farmland across a raft of emerging and developed economies have already fanned concerns in the West that they may eventually use the resulting influence to advance a political agenda.

"The idea of state capitalism is extending itself. It's been in China and the Middle East, and it's now coming to Japan," said Sven Behrendt, a SWF expert and managing director of Geneva-based consultancy Geoeconomica. "FX reserves have become a power resource."

"Governments are becoming more alert and innovative about what resources they have to pursue national interests. The state is taking a new posture vis-a-vis international markets as an economic actor itself."

Global Battle

The moves in Japan comes in the context of a recent row with China over disputed islands in the East China sea that hit supplies of rare earth minerals, in which China accounts for about 97 percent of global production.

Japan buys around half of China's rare earth, but Beijing imposed a de facto ban on exports after Japan detained a Chinese trawler skipper near the islands, claimed by both countries and near potentially huge oil and gas reserves.

Buying such resources would also come at a time when Japan is accumulating record amounts of dollars as a result of its efforts to stem the yen's rise, which some officials have warned could lead to a broader global "currency war."

Sovereign funds manage windfall revenues of around $3 trillion globally for future generations, representing nearly a tenth of global stock market capitalisation.

Data from financial advisory group Monitor shows deals in coal, petroleum and natural gas amounted to $11.2 billion in 2009, or over 16 percent of total value of publicly reported SWF investments. This compares with $1.3 billion in 2008.

Many deals on resources and farmland are conducted outside of the public domain, which makes the figure even higher.

Resource Hunt

Many say there is nothing wrong with buying assets in an open market in a transparent fashion. However, a "sovereign" element in a deal has stirred jitters that foreign governments may take control of assets that are important for national security and strategic reasons. Canada has already expressed concern to potential bids by China into Potash, saying state-owned enterprises need to invest with market-based motives rather than acting as an agent for a foreign government's interests. 

China's wealth fund CIC and Singapore's state owned Temasek are cited as potentially interested in a $39 billion deal that aims to secure supplies they need to feed both populations.

CIC — which a Japanese sovereign wealth fund may be modelled after — is openly eyeing energy, agriculture and power sectors, with its plans to invest in Russia and Indonesia.

Media reports say Venezuela and India had also contemplated creating a multi-billion sovereign wealth fund to jointly acquire energy assets globally.

Gulf nations are extending their purchases of farmland for food security to East Europe and Australia in an unapologetically strategic manner.

"There is a need within SWF source countries to safeguard the flow of food imports at reasonable prices," UAE central bank governor Sultan bin Nasser Al-Suwaidi said earlier this year.

The United Nations has expressed concern that farmers' rights in developing nations could also be compromised as rich countries buy farmland to secure food supplies.

Michael Power, global strategist at Investec Asset Management, says Japan had pioneered state-led acquisitions of energy and resources in its pre-war industrial and financial business conglomerates.

"The battle for resources is a geo-economic issue at a national level. Japan is switching itself back to (focusing on) the security of supply," Power said.

2010 CNBC� Article Source