What's Japan Planning to Do with $1 TRILLION in Treasuries?

Joined : 23 Dec 2007 Posts : 241 Location : Nigeria

Good Day Currency Traders!

If you asked people which country holds the most dollars in their reserves, I’m betting most would say “China,” because the Chinese get the most publicity for the dollars they have squirreled away.

However, Japan actually runs “neck and neck” with China in terms of dollar reserves. In fact, Japan owns the most U.S. Treasuries according to the Treasury department.

So while China could have a significant effect if they sold dollars…Japan could have an even bigger impact because of their huge number of U.S. Treasuries.

With that said, let’s look into what Japan is thinking of doing with those “dollar reserves.”

The Next Big Ticket Item on Japan’s
Dollar Wish List
Japan has US$1.01 trillion in its reserves. That’s a new record. The reserves are getting so large that the Japanese feel they should do something with them.

Also, those dollars have been losing quite a bit of value in recent years, so they’re starting to “re-think” letting those dollars sit in their reserves.

Just last month, in fact, the ruling Liberal Democratic party in Japan formed a group to discuss creating a Sovereign Wealth Fund (SWF) of those dollars. This SWF would manage its US$39 billion in interest and profits earned from the US$1 trillion in dollar reserves (and of course, the reserves itself).

Reserves Financed by Debt that Makes Even the Debt-Backed Dollar Jealous

However, the Japanese are facing a couple of dilemmas. For instance, unlike China which receives its dollar reserves from its massive exports, Japan’s reserves are backed by debt. That means they’ve been selling trillions of yen to buy those dollars.

So Japan may not be able to use the reserves to pare down its public debt, which is now the world’s largest, without selling some dollar-denominated assets. That could cause a huge disruption in the currency markets.

The Japanese Vice Finance Minister thinks the country may have to rely on borrowed money for investment capital.

Then there’s also the problem of knowing how many dollars to keep in reserves for interventions. Remember the Bank of Japan loves to take control their currency if they believe their exporters are getting crushed by a high valued yen.

So they want to keep some “ammo” on the sidelines in case they need to intervene in the currency market.

It’s going to be interesting to watch and see how the Japanese maneuver through this. But what’s important to know is that more and more countries as a whole are concerned about their dwindling dollars that they are holding.

Over the past 10 years, the Japanese central bank’s reserves have increased five-fold. They’ve continually sold yen to stock up on U.S. Treasuries.

It’s going to be interesting to see what happens next. The Japanese could dump their U.S. Treasuries and adjust to a higher yen exchange rate.

After all, the sub-prime crisis has caused money to run into Treasuries and that has driven the price up quite a bit. It is rumored that Japan is up 10% on their bond gains just in the last eight months.

So if there were ever a time to sell off some of those Treasuries and do something else with the money (like fund a Sovereign Wealth Fund)…that time would be now.

Keep an eye out to see if they end up following through with this Sovereign Wealth Fund plan or not