Bloomberg News

Japan Turns Activist on Reserves as Global Economy Rank Slips

December 28, 2011

Dec. 28 (Bloomberg) -- Japan is crafting ways of using its $1.2 trillion of currency reserves, the world’s second largest, helping bolster its role in international finance as economic stagnation diminishes its share of global output.

Prime Minister Yoshihiko Noda, who is in New Delhi today, is likely to seal an agreement making about $10 billion of Japan’s reserves available to India if needed, according to a Japanese government official speaking on condition of anonymity. Noda three days ago oversaw a deal with China to expand use of the yuan and yen in bilateral trade and purchase Chinese bonds. At home, officials are deploying 10 trillion yen ($128 billion) in a fund aiding companies in overseas acquisitions.

“While Japan is losing its influence in various areas in the global economy, foreign reserves can work as an effective tool to yield Japanese influence and show its presence,” said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. in Tokyo and a former chief foreign-exchange dealer at Japan’s central bank. “This is still a remote concept, but Japan’s recent moves are also considered as a significant step to foresee a future possible unification of Asian economies.”

The bilateral deals with China and India help each nation address current priorities, with Premier Wen Jiabao seeking to increase the use of yuan in commerce and Prime Minister Manmohan Singh contending with financial risks from a slump in the rupee. For Japan, the steps strengthen the country’s role after it saw China overtake it as the world’s second-largest economy.

IMF Contribution

Japan is also prepared to use its reserves to contribute to an expansion in the International Monetary Fund’s resources that’s aimed in part at boosting the IMF’s ability to respond to Europe’s debt woes. Japan will make that decision once European leaders have shown a clear and specific plan on how to resolve its crisis, the Japanese government official said.

Reserves in Japan swelled to $1.22 trillion in November from $1.04 trillion at the end of last year, propelled in part by a resumption of currency intervention under Noda, starting with one round in September 2010 when he was finance minister. With Noda as prime minister, yen sales continued with at least three episodes this year to combat a 52 percent appreciation in the currency in the past five years.

The government is providing some of its foreign-exchange reserves to the state-run Japan Bank for International Cooperation to aid exporters and spur purchases of overseas assets, a way of helping companies cope with a stronger currency that intervention alone cannot reverse.

Rupee Drop

India, Asia’s third-largest economy, had $302 billion as of mid-December. With a current-account deficit, slowing domestic growth and increased international financial stress stemming from Europe, investors have driven the rupee down 16 percent against the dollar this year, forcing the central bank to tap its reserves in defense. India’s holdings slid $14 billion in the four weeks to Nov. 25.

“It’s like an insurance cover or padding to the foreign- exchange reserves in a crisis,” Dharmakirti Joshi, a Mumbai- based economist at Crisil Ltd., the local unit of Standard & Poor’s, said of the currency-swap deal with Japan. “It will help in times of dollar shortage.”

Japanese efforts to support regional neighbors are long- standing. In October 1998, Japan unveiled $30 billion in aid under the so-called Miyazawa Initiative, named after Finance Minister Kiichi Miyazawa, designed to help countries obtain funds at a time when emerging-market bond issuance had largely dried up amid the 1997-98 financial crisis.

South Korea Swap

The country is also a signatory to the Chiang Mai Initiative, a $120 billion foreign-exchange pool with the Association of Southeast Asian Nations, China and South Korea. In October, it expanded a bilateral swap agreement with South Korea to $70 billion.

The new initiative comes under the tenure of Vice Finance Minister for International Affairs Takehiko Nakao, 55, Japan’s top currency official, who oversaw the estimated record 8 trillion yen of intervention on Oct. 31. On his third day in the job, the Tokyo University and University of California at Berkeley graduate helmed the nation’s Aug. 4 yen sales to stem the currency’s advance.

With yields on U.S. Treasuries falling to record lows, returns on Japan’s reserves have diminished. The Bank of Japan’s capital ratio dropped to its lowest level since the 1979 fiscal year in September, hurt by losses on foreign-currency assets. As the nation’s relative economic links to the U.S. loosen with the rise of China and other major emerging markets, it makes sense to diversify the holdings, said economist Robert Feldman.

Relative Strength

“The relative strength of the United States economy compared to other countries, particularly the emerging economies, has been falling,” said Feldman, head of Japan economic research at Morgan Stanley in Tokyo. “It’s only normal for portfolio managers -- official and private sector -- to diversify their assets in a way that is more reflective of the structure of global gross domestic product.”

China surpassed the U.S. as Japan’s largest export destination in 2009, finance ministry data show. Japanese companies such as Nissan Motor Co. and Honda Motor Co. are increasingly relying on locations including Thailand to boost production.

Noda reached a deal Dec. 25 with Wen that will promote direct trading of the yen and yuan without using dollars. Japan will also apply to buy Chinese bonds next year, allowing the investment of yuan that leaves China during the transactions. Encouraging direct yen-yuan settlement should reduce currency risks and trading costs, the two governments said.

--With assistance from Mayumi Otsuma and Andy Sharp in Tokyo and Unni Krishnan in New Delhi. Editors: Chris Anstey, Lily Nonomiya

To contact the reporter on this story: Toru Fujioka in Tokyo at

To contact the editor responsible for this story: Paul Panckhurst at

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