Japan Foreign Reserves witnessed the largest fall in its history during the month of August, when the country intervened in the currency market to bolster the yen against the US dollar on a record scale. Figures released by Japan’s Ministry of Finance indicate that the foreign reserves declined by $79.6 billion, or 6.18%, to $1.208 trillion from $1.287 trillion in July.
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The massive decline came after Japanese authorities sold US dollars and bought yen amid the yen’s depreciation to historic lows not seen in nearly four decades.
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Japan Foreign Reserves Fall After Massive Intervention
Japan Foreign Reserves were primarily affected by the drop in foreign securities, which comprise about 70% of the country’s total foreign reserves of the country. These reserves are quite considerable, as Japan maintains its foreign reserves in terms of US government securities acquired over the years through its currency operations.
While buying dollars to prevent an appreciation of the yen against the dollar, the Japanese government increases its foreign asset positions. Yet, selling dollars and buying yen by Japan causes its reserves to be reduced.
However, the Japanese Ministry of Finance indicated that the country invested approximately ¥15.4 trillion or $98.66 billion in currency intervention from July 30 until August 26.
This investment was the largest that Japan has ever undertaken in a month. This effort was geared towards slowing down the fall of the yen and mitigating pressures resulting from the rapid depreciation of the yen.
Yen Recovers After Tokyo Steps In
Before the intervention, the Japanese currency had weakened to nearly ¥164 against the US dollar, which was its lowest point in about 40 years. After the intervention, the currency appreciated to about ¥155.20 against the dollar on August 3.
However, the rebound did lose some momentum after the yen rose towards ¥160 but then recovered to about ¥155-156 in early September.
Price movements point to the dilemma that Japan faces. Intervention can help temporarily, but to sustain a strong yen, very large amounts of foreign currency are needed.
Japan and US Coordinated Currency Action
A notable move was the participation of the US in the whole situation. There was part of the yen buying that involved the US and Japan together, which is their first coordinated currency intervention since 2011.
It was a surprise in itself because the prospects for such measures were not very high.
Both Japan and the US have been mentioning the Federal Reserve dollar liquidity arrangement that was established during the coronavirus outbreak. This would help Japan get dollar liquidity without having to sell US Treasuries right away.
That would increase the options available for Tokyo if there is a need for another intervention. But the most recent information on Japan’s foreign reserves has shown that it does not take long for Japan to use up its foreign assets in protecting the yen.
Given the current situation with the yen, it is important to watch the future releases of this report.
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