Ja­pan builds $124 bil­lion cash hoard even as it cuts trea­suries

The Pak Banker - - BUSINESS -

Ja­pan has stock­piled a record amount of cash at cen­tral banks as part of its cur­rency re­serves, af­ter sell­ing Trea­suries, as pol­icy mak­ers around the world ad­just to ris­ing U.S. in­ter­est rates and fall­ing bond­mar­ket liq­uid­ity.

For­eign- ex­change de­posits in the vaults of over­seas in­sti­tu­tions bal­looned to $124.1 bil­lion as of Jan. 31, from $14 bil­lion at the end of 2014, ac­cord­ing to data from Ja­pan's Min­istry of Fi­nance. That's the most based on fig­ures go­ing back to 2000, and ac­counts for about 10 per­cent of the na­tion's to­tal re­serves. While the fig­ure isn't bro­ken down, it co­in­cides with a surge in green­backs held by global cen­tral banks at the U.S. Fed­eral Re­serve.

Any shift away from Trea­suries would pro­tect Ja­pan's re­serves from po­ten­tial losses as the Fed ex­tends mon­e­tary pol­icy tight­en­ing and con­cerns rise over bond-mar­ket liq­uid­ity. Dol­lar hold­ings kept in cash stand to ben­e­fit from higher U.S. in­ter­est rates and a stronger cur­rency, even as mon­e­tary au­thor­i­ties in Ja­pan and across Europe start charg­ing banks for some de­posits.

"Ev­ery­body's de­valu­ing their cur­ren­cies, ev­ery­where across the planet, ex­cept the U.S. dol­lar," said John Gor­man, the head of U.S. debt trad­ing for Asia and the Pa­cific in Tokyo at No­mura Hold­ings Inc., the na­tion's big­gest bro­ker­age. "Peo­ple are more com­fort­able putting their re­serves in a cur­rency that's ap­pre­ci­at­ing rather than a cur­rency that's de­pre­ci­at­ing."

An of­fi­cial in the of­fice of for­eign ex­change re­serve man­age­ment in the Min­istry of Fi­nance de­clined to com­ment on the mat­ter, say­ing it can af­fect mar­kets.

The in­crease in Ja­pan's cash at for­eign in­sti­tu­tions is a change in the com­po­si­tion of the coun­try's for­eign-ex­change re­serves. The over­all stock­pile, the world's largest af­ter China's, has fallen al­most 3 per­cent to $1.19 tril­lion since it reached a record at the start of 2012. Ja­pan, Amer­ica's largest over­seas cred­i­tor af­ter China, is cut­ting its Trea­suries po­si­tion. The stake among both govern­ment and pri­vate in­vestors dropped 8.8 per­cent in 2015, the first sales since 2007, based on the most re­cent Trea­sury Depart­ment data.

The re­duc­tion dove­tails with a de­cline in for­eign se­cu­ri­ties in Ja­pan's for­eign ex­change re­serves. Since Novem­ber 2014, bond hold­ings fell $126.4 bil­lion, while de­posits rose $116.9 bil­lion. The strat­egy of sell­ing Trea­suries and hold­ing dol­lars would al­low in­vestors to get out of older U.S. govern­ment se­cu­ri­ties that can be dif­fi­cult to trade and may get even tougher to trans­act if the Fed raises rates fur­ther.

De­clin­ing liq­uid­ity in the Trea­sury mar­ket is driv­ing de­mand for the new­est, eas­i­est-to-sell se­cu­ri­ties. When pol­icy mak­ers in­creased bench­mark bor­row­ing costs in De­cem­ber, they in­di­cated they will act four more times in 2016. Even so, the Bloomberg U.S. Trea­sury Bond In­dex has ad­vanced 3.4 per­cent so far in 2016 in a flight from riskier as­sets.

"Asian cen­tral banks in gen­eral have been ex­press­ing con­cerns about liq­uid­ity of their hold­ings of sea­soned Trea­sury se­cu­ri­ties," said Lou Cran­dall, the chief econ­o­mist at Wright­son ICAP LLC in Jersey City, New Jersey, and a for­mer econ­o­mist for the Fed. "Ja­pan built up its liq­uid­ity cush­ion through sell­ing Trea­suries and in­creas­ing cash at the Fed. It's a lit­tle sur­pris­ing that more for­eign cen­tral banks haven't taken the same route."

Ja­pan's switch into hold­ing more cash as part of the coun­try's re­serves came as as­sets in the Fed ac­count used by cen­tral banks to park dol­lars surged. Funds in the so-called for­eign re­verse re­pur­chase agree­ment pool rose to a record $246.6 bil­lion as of Feb. 17, capped by a 95 per­cent in­crease last year, based on Fed data.

The New York Fed prob­a­bly raised the rate it pays for­eign cen­tral banks on their overnight bor­row­ings to an av­er­age of about 0.13 per­cent in the fourth quar­ter of 2015, ac­cord­ing to es­ti­mates by Wright­son's Cran­dall.

The rate av­er­aged 0.09 per­cent in the first nine months of 2015, up from 0.03 per­cent dur­ing the same pe­riod of 2014, based on the U.S. cen­tral bank's quar­terly fi­nan­cial state­ments. One-month Trea­sury bill rates av­er­aged 0.07 per­cent from Oct. 1 to Dec. 31. Coun­tries hold money abroad to in­sure they have ac­cess to funds to make in­ter­na­tional pay­ments and in case of an emer­gency. In Ja­pan's case, th­ese funds surged in 2003 as the cen­tral bank sold yen, try­ing to boost de­mand for its ex­ports and strengthen its econ­omy. It used yen to buy for­eign cur­ren­cies, in­creas­ing its re­serves.

The same thing hap­pened in 2011 as Ja­pan ramped up yen sales to record lev­els. A 6.6 per­cent yen rally this year against the dol­lar led to spec­u­la­tion au­thor­i­ties will in­ter­vene again to halt its gains.

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