Japan is in advanced discussions to create its first sovereign wealth fund in a move aimed at mobilising one of the world’s biggest pools of foreign exchange reserves.

The plans, described to The Times by the Minister for Financial Services and Administrative Reform, would give Japan membership of what is fast becoming a formidably powerful club of investors.

Yoshimi Watanabe revealed that a high-level team of advisers was designing the operations of the fund, and that representatives had visited existing sovereign wealth funds in the region.

China and South Korea have both launched state-backed investment funds, and the Japanese Government is understood to have talked extensively with senior managers of GIC, Singapore’s notoriously opaque fund.

The Japanese fund, when it is established, is most likely to make initial investments in its domestic stock market. It may even be used to shore up a Tokyo stock market that is, on paper, among the most heavily discounted in the world.

Mr Watanabe hinted strongly that the fund could also act as a major source of capital in markets ravaged by the sub-prime crisis. “For countries that cannot turn to their own people for capital for political reasons, they have to turn to foreign capital that does not complain as loudly,” he said.

Sources close to the sovereign wealth fund steering committee have said that the size of the fund is not decided but that if only 5 per cent of Japan’s foreign exchange reserves were invested more actively, the resulting fund would control about $50 billion (£25.2 billion). Managers for the fund are expected to be drawn from the Japan Development Bank and may also be sourced from the now disbanded Industrial Revitalisation Corporation of Japan — the respected state-backed turnaround vehicle.

Sovereign wealth funds have played an increasingly significant role in global investment in recent months, with several oil-rich Middle Eastern and Asian funds taking stakes in some of America’s sub-prime-blighted banking giants, including UBS, Citigroup, Merrill Lynch and Morgan Stanley.

Banks and brokerage firms might have to raise as much as $143 billion more to cover potential losses on sub- prime-related bonds if insurers that underwrite the securities are aggressively downgraded by ratings agencies, according to a new report by Barclays Capital. It says the global banking industry, which has lost about $136 billion on falls in their mortgage bond portfolios, face further losses if the credit worthiness of so-called monoline insurers such as MBIA and Ambac declines dramatically.

The insurers guarantee the interest and principal payments on the bonds in the event of a default. As the rate of default on the mortgages backing the bonds has risen, the insurers face such large claims that they may be unable to meet them.

The small group of monolines that dominate the industry have traditionally held an AAA credit rating, but all risk downgrades as their ability to meet claims is increasingly called into question. Ambac last week became the first AAA monoline to lose the top rating, while several others are being reviewed by the ratings agencies.

The loss of an AAA rating automatically pushes down the value of the bonds that an insurer underwrites as the owners fear they may not get paid.

If the insurer does not meet the claim, the bonds would lose even more value and could potentially land the banking industry with $143 billion more in losses, Barclays Capital said.

They came, they saw, they invested

— Government of Singapore Investment Corp and unnamed Middle East fund invested SwFr13 billion in UBS

— Government of Singapore Investment Corp and Kuwait Investment Authority invested $12.5 billion in Citigroup

— Abu Dhabi Investment Authority invested $7.5 billion in Citigroup

— Kuwait Investment Authority and Korean Investment Fund invested $6.6 billion in Merrill Lynch

— Temasek Holdings (Singapore) invested $6.2 billion in Merrill Lynch

— China Investment Corp invested $5 billion in Morgan Stanley

— Temasek Holdings invested $4.6 billion in Standard Chartered

— Istithmar (Dubai) invested $1 billion in Standard Chartered

— China Investment Corp invested $3 billion in Blackstone

— China Development Bank invested $3 billion in Barclays

— Temasek Holdings invested $2 billion in Barclays

— Mubadala (Abu Dhabi) invested $1.35 billion in the Carlyle Group

— Dubai International Capital took a “substantial stake” in HSBC

Times Recommends

• UK savers left in lurch as Icesave crumbles
• RBS shares close under £1 on bailout fears
• Asian stocks rebound on Australian rate cut