Japan Foreign Exchange Reserves Edge Up on Interest Rate Income

Japan's foreign reserves, the world's second-largest, rose to $913.572 billion at the end of June, thanks to interest rate income from deposits and bonds held in the reserves, the Ministry of Finance (MOF) said on Friday.

They were up from $911.137 billion at the end of May but shy of the record $915.623 billion hit at the end of April.

A rise in the euro, which boosted the dollar value of euro-denominated reserves, contributed to the increase, a ministry official told reporters.

The euro traded at 1.3542 against the dollar at the end of June, up from $1.3453 a month
earlier, the official said.

The reserves at the end of June included $768.407 billion in securities and $124.354 billion in deposits. The rest includes IMF reserve positions, special drawing rights and gold.

Japan's reserves are second only to those of China, which has $1.2 trillion in external reserves. Russia ranks third, followed by Taiwan and South Korea, the official said.

Japan's reserves ballooned after yen-selling intervention amounting to a record 20 trillion yen ($162.7 billion) in 2003 and a further 15 trillion yen in the first three months of 2004, as Tokyo tried to keep a rapid rise in the yen from derailing a then-fragile economic recovery and accelerating deflation.

Tokyo has kept out of the market since then, but the reserves have continued to grow steadily, partly on interest rate income.

The government does not disclose the currency breakdown of the external reserves. But historical data on Japan's currency intervention, which has mostly taken the form of dollar buying, suggests most of Tokyo's hefty reserves are in dollars.

The MOF, which is in charge of foreign reserves management, has said it has no plans to diversify the currency make-up.

It is also cautious about the idea of setting up a new public agency to more actively manage foreign reserves, although China's decision to set up an investment fund to manage part of its massive reserves has prompted some lawmakers to question whether Japan is doing enough.

The MOF's official guideline says attention should be paid to safety and liquidity in managing the nation's reserves, although under those constraints the government will pursue profitability.

Over the past few years, the MOF has been diversifying the types of dollar-denominated assets in the reserves and has also shifted to a more active management approach from its traditional buy-and-hold policy.

But calls for improvement in the system persist. Takatoshi Ito, a member of the government's top economic council, told Reuters on Thursday that Japan should more effectively manage public money, including its foreign reserves, and one idea is to set up a new fund to manage
interest rate income from foreign assets held in the reserves.

Currently, short-term government paper is issued to balance a special budget account that holds Japan's foreign reserves when the asset side of the balance sheet increases due to interest rate income from deposits and securities held in the reserves.

Setting up a fund for at least the interest rate income could avoid the need for extra issuance of public debt, Ito said.