Financial Sector

March 2008

Foreign reserves top $1 tln due to past dollar-propping efforts
The nation's foreign exchange reserves surpassed $1 trillion for the first time as of the end of February thanks to past efforts by the Japanese government to bolster the greenback. This makes Japan the only country besides China to have foreign exchange reserves of more than $1 trillion. According to the Ministry of Finance, the figure was $1.007 trillion as of Feb. 29, up $11.93 billion from the end of January and a record for the eighth straight month. Interventions several years ago by government and the Bank of Japan to prevent the yen from strengthening are the main reason for the growth in dollar reserves. A series of large-scale interventions worth some 35 trillion yen took place from 2003 to the spring of 2004. Although no such operations have been conducted since then, the balance has continued to grow on investment gains because the reserves are invested in such instruments as U.S. Treasury bonds. The government acquires the yen needed for such operations from financial institutions by issuing financing bills. This means that such market interventions lead to a ballooning of both assets and debt on the nation's balance sheet. There are some concerns that Japan's foreign exchange reserves are weighted too heavily in the dollar. A weakening of the greenback could hurt the nation's finances because the value of those assets in yen terms would decline. To address this issue, some lawmakers in the ruling Liberal Democratic Party are calling for the establishment of a government-controlled fund of roughly 3 trillion yen that employs investment gains from foreign exchange reserves.(Nikkei Weekly, March 10, 2008)