Japan Moves to Strengthen Its Yen Intervention War Chest

Japan’s government is considering changes to how it manages its $1.3 trillion in foreign-exchange reserves, according to a draft growth strategy reviewed by Reuters.

The reserves provide Japan with the financial resources needed to intervene in currency markets and support the yen. However, the government also wants to improve returns and make more effective use of public assets.

Japan Seeks Higher Returns From Foreign Reserves

The proposal reflects Prime Minister Sanae Takaichi’s efforts to support Japan’s economy through more active government spending.

Japan is currently the world’s fourth-largest economy, but its public finances remain under considerable pressure.

According to the draft strategy, the government will study whether assets held by the public sector can be managed more efficiently. This review will include the foreign-exchange fund special account.

However, any changes would still need to respect the original purpose of the reserves.

Yen Intervention Reduces Japan’s Reserves

Tokyo resumed large-scale currency intervention in late April after the yen weakened beyond 160 against the U.S. dollar.

Japanese authorities reportedly spent approximately $73 billion buying yen in an effort to slow the currency’s decline.

As a result, Japan’s foreign-exchange reserves recorded a 5.6% decline in May. The drop highlighted the financial limits of maintaining repeated, large-scale intervention.

The USD/JPY exchange rate recently traded near 161.72, showing that the yen remains under significant pressure.

U.S. Treasuries Form a Large Part of the Portfolio

The draft report did not provide specific details about potential changes to the reserve portfolio.

Japan accumulated much of its foreign-exchange reserves during previous periods of dollar-buying intervention. Analysts believe a large share of the money is invested in U.S. Treasury securities.

These assets offer high liquidity and can be sold quickly when Japan needs dollars to finance yen-buying operations.

Income generated by the reserves, including interest from U.S. Treasuries, is generally transferred to the government’s main account. The funds then help finance the national budget.

Reserve Profits Could Support Government Spending

Takaichi has previously described Japan’s foreign reserves as a major beneficiary of the weak yen.

She also said that the reserves were performing well, which some government officials interpreted as a signal that the administration may want to use more of the profits for public spending.

One potential use could be funding a controversial proposal to suspend the consumption tax on food.

However, such a policy could face opposition because foreign-exchange reserves are primarily intended to protect financial stability rather than finance routine government programs.

Lawmakers Propose a Sovereign Wealth Fund

Some lawmakers from both the ruling and opposition parties have proposed combining several major public assets into a sovereign wealth fund.

The potential fund could include Japan’s foreign-exchange reserves, the Bank of Japan’s exchange-traded fund holdings and assets held by public pension funds.

Supporters believe a professionally managed fund could generate higher returns and provide additional revenue for the government.

Nevertheless, combining these assets would raise difficult questions about risk, liquidity and the independence of Japan’s financial institutions.

Officials Warn Against Major Portfolio Changes

Government officials have warned that drastically changing the reserve portfolio would be difficult.

Japan must keep much of the money in safe and liquid assets so it can respond quickly to extreme currency movements.

A source familiar with the confidential report said pursuing returns that conflict with the reserves’ main purpose would be challenging.

This means Japan may have limited room to invest the money in riskier assets, even if those investments could potentially produce higher profits.

Higher Returns Could Increase Financial Risk

Akira Moroga, chief market strategist at Aozora Bank, warned that focusing too heavily on profits could reduce the safety of Japan’s reserves.

He argued that foreign-exchange reserves support a country’s financial credibility. Therefore, they should mainly remain invested in highly reliable and liquid securities.

A shift toward riskier assets could concern investors and weaken confidence in Japan’s ability to defend the yen during periods of severe market volatility.

Selling U.S. Treasuries Could Be Difficult

Saisuke Sakai, senior economist at Mizuho Research Institute, said that making greater use of the reserves could require Japan to sell some U.S. Treasury holdings.

However, such a move could become politically and economically sensitive.

Selling Treasuries while U.S. long-term interest rates are rising could produce losses. It could also affect Japan’s relationship with the United States.

Japan remains the largest foreign holder of U.S. government debt, making any significant change to its Treasury portfolio important for global financial markets.