The administration of Shinzo Abe is investigating the formation of a Japan Investment Corporation that would manage a portion of Japan's nearly $1,000bn of foreign exchange reserves. In addition to increasing the income from this huge national asset, Japan can also alleviate yen appreciation pressure and promote the country as an inter-national financial centre.

Equity returns in developed countries clearly exceed fixed income returns over the long run and global diversification provides better rewards relative to risk. Indeed, from 1985, the World Ex-Japan MSCI index in yen terms has returned more than 570 per cent, while the Lehman US Treasuries index returned only 149 per cent.

Thus, while Japan's investment of its reserves has been profitable, better performance could easily have been achieved. Indeed, if Japan had started investing its forex reserves 10 (or, even better, 20) years ago, it might not have needed to raise value-added taxes.

Now is a good time to start such investing to prevent more severe rises in VAT, which the Ministry of Finance suggests will need to reach double-digit levels from its current 5 per cent in order to balance the budget. While the goal of reducing government debt is laudable, this would be a significant burden on economic growth.

Would Japan be buying at the top of global equity markets, or at a bad time regarding the level of the yen? No one knows if we are at the top of a particular investment cycle. But one thing is certain: if a JIC gradually invested, say, 10 per cent of its targeted position per annum, it would not need to worry about market timing.

Don't reserves need to be liquid?It is very unlikely that 100 per cent of reserves would ever be required in a short period of time and global equity and non-US bond markets are quite liquid in any regard. Unlike China, with its move to invest in Blackstone, Japan would probably avoid large company stakes or private equity investments owing to concerns about liquidity and excess risk concentration.

Isn't it too risky, as reserves are financed with short-term yen debt? Clearly, global equity and fixed income returns will always have some volatility, but these have rarely stayed negative for long and have a superior long-term investment showing. Individual and institutional investors face these risks every day and a government has an even longer time horizon and excess assets to bear such risks.

Won't this make the yen rally or US Treasuries plunge? If invested gradually and without specific or disclosed geographic targets, a transition out of US Treasuries would be likely to have minimal effects on global currency trends, especially as much of their sales proceeds would be re-invested in US equities. The same would hold true for euro-denominated investments. Furthermore, government investment corporation assets normally are segregated from official forex reserves, and in the case of Singapore's Government Investment Corporation, its true size is secret. By reducing the worryingly large headline amount of reserves and increasing their perceived sustainability, this is also likely to reduce yen appreciation pressure.

Is it legal to invest in equities? There would clearly need to be new legislation to set up a JIC and to transfer money out of the current fund that holds forex reserves. Inter-agency rivalries and oversight interference have been impediments in certain GICs, so the agency may be set up as a purely independent entity.

How would Japan manage this money? As with most GICs, some combination of outsourcing and internal management is likely. There is little doubt that such large amounts of assets would attract talented individuals, whether foreign or Japanese, to work for a JIC and increase Japan's role as an international financial centre. Indeed, one of the Singapore GIC's main mandates has been to award assets to firms that set up investment operations in Singapore and thus improve its stature as a financial centre. Many readers might assume that investment management firms such as my own would obviously support a JIC. But even if Japan decided not to outsource its funds, most of these firms would support it on its merits alone.

Japan faces many challenges, especially in terms of its demographics and accumulated government debt. Therefore, Japan needs to take more risk, but calculated risk, for the sake of its future generations. A JIC would fulfil this need and should start contributing as soon as possible.

The writer is head of global strategy at Nikko Asset Management in Tokyo