Japan recorded 5.6% drop in reserves in May after interventionSpecific changes to asset allocation of reserves not spelled outReserves are believed to be largely invested in U.S. Treasuries<\/p>\n
TOKYO, June 24 (Reuters) – Japan’s government plans to examine ways to improve management of its $1.3 trillion foreign exchange reserves, a \u200cwar chest for future yen intervention, according to a draft growth strategy report reviewed by Reuters on Wednesday.<\/p>\n
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 \u200beconomy.<\/p>\n
Sign up here.<\/a><\/p>\n “The government will examine the merits of improving management and making more effective use of assets held by the \u200bpublic sector, including the foreign exchange fund special account, taking into account their intended purposes,” according \u2060to the draft of the strategy, a centrepiece of Takaichi’s policy agenda.<\/p>\n Tokyo resumed massive intervention in late April when the \u200bcurrency slid past 160 per dollar, with a $73 billion yen-buying operation, leading to a record 5.6% drop<\/a> in reserves in May, highlighting \u200bthe limits of sustained, large-scale intervention.<\/p>\n 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 U.S. Treasuries.<\/p>\n The bulk of the surplus from the reserves, including \u200bincome from U.S. Treasuries, is transferred to the general account as a funding source for the state budget.<\/p>\n Takaichi once said<\/a> the foreign \u200breserves were a major beneficiary of the weak yen and “performing very well,” a remark that some government officials saw as a signal she \u200choped to \u2060use the surplus to fund a controversial plan to suspend a consumption tax on food.<\/p>\n Some lawmakers from both the ruling and opposition parties are proposing folding foreign reserves, central bank ETF holdings and pension assets into a sovereign wealth fund in pursuit of higher returns.<\/p>\n Government officials, however, said drastically changing the portfolio of the reserves would be unrealistic, given that the reserves were primarily held \u200bas a ready source of \u200bfunds for currency intervention.<\/p>\n “It would \u2060be 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 \u200bas the report is confidential.<\/p>\n “While aiming for higher profits is understandable, such strategies may undermine \u200bthe safety of \u2060the reserves, which could be viewed negatively by markets,” said Akira Moroga, chief market strategist at Aozora Bank.<\/p>\n “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.<\/p>\n “If \u2060you want \u200bto make effective use of foreign exchange reserves, it would mean selling U.S. \u200bTreasuries,” said Saisuke Sakai, senior economist at Mizuho Research Institute. “At a time when U.S. long-term interest rates are rising, would that be feasible in light of \u200bthe U.S. relationship?”<\/p>\n Japan is the largest foreign holder of U.S. Treasuries.<\/p>\n Reporting by Takaya Yamaguchi and Makiko Yamazaki; Editing by Jacqueline Wong<\/p>\n Our Standards: The Thomson Reuters Trust Principles., opens new tab<\/a><\/p>\n