Japan plans to better manage war chest for yen intervention

[TOKYO] Japan’s government plans to examine ways to improve management of its US$1.3 trillion foreign exchange reserves, a war chest for future yen intervention, according to a draft growth strategy report reviewed by Reuters on Wednesday (Jun 24).

The plans reflect the government’s desire to boost returns on the reserves and help replenish its tattered finances, as Prime Minister Sanae Takaichi pledges proactive spending to support the world’s fourth-largest economy.

“The government will examine the merits of improving management and making more effective use of assets held by the public sector, including the foreign exchange fund special account, taking into account their intended purposes,” according to the draft of the strategy, a centrepiece of Takaichi’s policy agenda.

Tokyo resumed massive intervention in late April when the currency slid past 160 per US dollar, with a US$73 billion yen-buying operation, leading to a record 5.6 per cent drop in reserves in May, highlighting the limits of sustained, large-scale intervention.

The draft strategy does not spell out specific changes to the asset allocation of the reserves, which were accumulated during past bouts of dollar-buying intervention and are believed to be largely invested in US Treasuries.

The bulk of the surplus from the reserves, including income from US Treasuries, is transferred to the general account as a funding source for the state budget.

Takaichi once said the foreign reserves were a major beneficiary of the weak yen and “performing very well”, a remark that some government officials saw as a signal she hoped to use the surplus to fund a controversial plan to suspend a consumption tax on food.

Some lawmakers from both the ruling and opposition parties are proposing folding foreign reserves, central bank exchange-traded funds holdings and pension assets into a sovereign wealth fund in pursuit of higher returns.

Government officials, however, said drastically changing the portfolio of the reserves would be unrealistic, given that the reserves were primarily held as a ready source of funds for currency intervention.

SEE ALSO

Yen at brink of 40-year low puts markets on intervention watch

Japan intervention risk mounts as yen drops to lowest since 2024

“It would be difficult to pursue returns in a way that runs counter to the purpose of the reserves,” said a source familiar with the matter who did not want to be identified as the report is confidential.

“While aiming for higher profits is understandable, such strategies may undermine the safety of the reserves, which could be viewed negatively by markets,” said Akira Moroga, chief market strategist at Aozora Bank.

“Ultimately, foreign reserves exist to support a country’s credibility, so they should primarily be held in highly reliable and liquid assets rather than riskier investments,” he added.

“If you want to make effective use of foreign exchange reserves, it would mean selling US Treasuries,” said Saisuke Sakai, senior economist at Mizuho Research Institute. “At a time when US long-term interest rates are rising, would that be feasible in light of the US relationship?”

Japan is the largest foreign holder of US Treasuries. REUTERS