April 8 (Bloomberg) -- Japan may establish a sovereign wealth fund to boost returns on some of its state assets as early as 2009, according to UBS Securities Japan Ltd.

The possibility of creating a state fund has risen recently because discussions on the use of public money have grown among lawmakers, according to Takashi Omori, chief Japan economist at UBS in Tokyo. The fund may be run by wealth managers from the private sector and overseas, he said.

``As cases of inefficient use of the road-specific budget have been disclosed in Diet discussions, the argument that public funds should not be managed by bureaucrats has become convincing,'' Omori said. A relatively small state fund of between 10 trillion yen ($98 billion) and 20 trillion yen may be created, he said.

A bill to maintain a provisionally higher tax rate on gasoline expired on March 31 after it was blocked by the opposition Democratic Party of Japan, which controls the upper house of parliament. Criticism over gasoline tax has risen because the levy, which is for road-related construction, was used to buy massage chairs and to pay for trips for employees of state-affiliated organizations that receive the funds.

Some lawmakers of the ruling Liberal Democratic Party, including former Financial Services Minister Yuji Yamamoto, have been discussing the feasibility of a state fund to manage about 4 trillion yen of interest and profits earned from the nation's foreign reserves and about 150 trillion yen of public pension reserves.

The capital loss in foreign reserves due to declines in the dollar also indicates the need for more efficient management, Omori said. The U.S. dollar has dropped more than 8 percent against the yen this year.

Rebuffed Calls

The Ministry of Finance has rebuffed calls from some politicians to create the fund on the grounds that money should be kept for intervention in the currency market. Finance Minister Fukushiro Nukaga has said Japan has no intention to set up a sovereign wealth fund.

Japan's Welfare Minister Yoichi Masuzoe last month said investing a third of the nation's 150 trillion yen pension reserves in higher-yielding assets is an option to boost returns.

Falling stocks, which are partly due to selling by foreign investors, increases the need for a fund that could hold Japanese equities as a long-term investment, Omori said.

To contact the reporters on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net

Last Updated: April 8, 2008 03:34 EDT