Dan Spillane: Japan Reserves on Edge of Collapse

- Japan does not have several months foreign reserve holdings left for US assets, as previously thought, because $650 billion in holdings--almost the entire amount--is already used up.

- Since Japan has run out of holdings, it is borrowing against itself using US bonds.

(SEATTLE) 02/17/04 - Figures outlined in a foreign news release concerning Japan's foreign exchange situation paint a picture that is far worse than headlines suggest. The news release, from the AFP--which apparently wasn't broadcast widely in the US news--has since been deleted from the web, but is dated 9 January 2004(1). Specifically, the release shows that Japan has already exhausted its resources to buy US dollar assets.

Japan has been buying US dollar assets to offset currency effects due to problems in the US economy, at a rate never before seen. This has been holding up US credit markets, and keeping US interest rates low, in a new and unusual way. This action is said to be unsustainable, because it represents a significant portion of Japan's total gross domestic product ("GDP").

In the release, the Japan Finance Ministry announced a "deal to sell US bonds to the Bank of Japan" to raise an amount of 100 billion dollars US. However, the release says the Finance Ministry has to buy the same back after three months. This short-term action is apparently necessary, because the release indicates almost all of Japan's foreign exchange reserves are already in foreign currencies--leaving none left to invest in US assets ("foreign currencies [already] accounted for 652.8 billion dollars"--out of 673.5 billion total.)

At the most recent rate, the additional 100 billion dollars would last a few months, at best. And there is a question as to whether the 100 billion dollars in US bonds might be unexpectedly sold. The news is significant because it suggests serious US credit problems are closer than previously thought, and the US Federal Reserve may no longer have the ability to keep US interest rates low.

Footnotes:

(1) "Japan's Foreign Reserves Hit Record", AFP, Friday January 9, 11:59,

http://asia.news.yahoo.com/040109/afp/ 040109035930business.html

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TRANSCRIPT FROM GOOGLE CACHE FOLLOWS…

Friday January 9, 11:59 AM
Japan's foreign reserves hit record after continued forex intervention

TOKYO, (AFP) - Japan's foreign exchange reserves, the world's largest, hit a record high at the end of 2003 as it continued to buy dollars to cap the rising yen and promised more funds for such intervention.

Japan's foreign exchange reserves rose 29 billion dollars to 673.5 billion dollars at the end of December for a fourth consecutive monthly record, the finance ministry said.

"The biggest reason for the gain was (currency) market intervention," said ministry official Hiroko Inaoka.

The ministry also said Friday that it is securing even more funds for intervention, saying it has struck a deal to sell US bonds to the Bank of Japan which could raise up to 10 trillion yen in cash by the end of March.

"This is to show the currency market that we are able to continue to react flexibly to deal with the situation," Ichiro Oishi, senior deputy director of the foreign exchange markets division of the ministry, told AFP.

Under the deal the finance ministry will have to buy back the US bonds from the Bank of Japan within three months of purchasing them, he said.

Japanese authorities spent 2.25 trillion yen (21.2 billion dollars) between November 27 and December 26 in an attempt to stop the yen's rise against the dollar, the ministry said Friday.

In recent trade, dealers said they suspected the authorities have been continuing to intervene in an effort to prevent a further rise in the yen and so protect the country's export-led economic recovery.

Japan's currency intervention in 2003 hit a record 20.06 trillion yen, according to the ministry.

The increase in the foreign reserves in December also reflected a five percent gain in the value of Japan's euro holdings against the dollar, ministry data showed.

Japan's foreign exchange reserves consist of securities and deposits denominated in foreign currencies, International Monetary Fund (IMF) reserve positions, IMF special drawing rights and gold.

Of the December total, foreign currencies accounted for 652.8 billion dollars, gold 10.2 billion dollars, IMF reserves 7.7 billion dollars and special drawing rights 2.8 billion dollars.

Japan remained the world's largest holder of foreign reserves for the 49th straight month, the ministry said, while China was second with 389.8 billion dollars as of the end of September.

ENDS

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