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Can Japan Reshape Its Research Funding?

If done right, Japan’s new national endowment fund to support university research could yield massive benefits. But the next several years will be critical for putting its asset portfolio on a better footing, selecting appropriate recipients, and setting conditions to shape how its resources are deployed.

TOKYO – Rightly concerned about a decline in Japanese universities’ research capabilities, the Japanese government has created a ¥10 trillion ($67 billion) fund to address the problem. While cash accounts for around 11% of the new University Fund of Japan (UFJ), the remaining 89% takes the form of a 20-year “loan” from the government, which borrowed the money from the market at a very low interest rate.

Overseen by a team of newly hired professional asset managers, management of the UFJ began in March 2022. The goal is to generate an annualized return of at least 3% above the rate of inflation, to offset the 3% of the principal (¥300 billion) that will be distributed to select universities each year. While many Japanese observers consider a 3% real return too high, most US and Canadian asset managers (such as those running pension funds and endowments) would see it as a rather low bar.

In any case, whether the target can be achieved in the long run depends on the portfolio. When I chaired the committee that laid the groundwork for the UFJ in 2021, we recommended a benchmark of 65% global equities (including alternative assets such as private equity, venture capital, and infrastructure funds) and 35% global fixed-income assets.