Japan’s opposition would diversify away from dollar

By Keiko Ujikane and Kyoko Shimodoi, Bloomberg

TOKYO — Japan’s opposition party, leading in polls two months ahead of elections, said the nation should consider shifting its $1 trillion of foreign reserves away from the dollar and buying International Monetary Fund bonds.

“In the medium to long term, we need to do what we can to avoid the risk of currency losses or economic turbulence that could result if the dollar were to swing,” Masaharu Nakagawa, the shadow finance minister in the Democratic Party of Japan, said in an interview in Tokyo on July 9. “Many countries are starting to diversify their reserves.”

Japanese investors are the biggest foreign holders of Treasuries after China with $685.9 billion of the securities in April, and Finance Kaoru Yosano said last month his trust in the bonds is “unshakable.” The DPJ beat the ruling Liberal Democratic Party to become the biggest party in Tokyo’s city assembly in elections yesterday, boosting its prospects ahead of national polls that must be called by Sept. 10.

“The current reality of Japan’s foreign-currency reserves is that their heavy weighting toward dollar assets means any fall in the dollar’s value leads to valuation losses,” said Susumu Kato, chief economist in Tokyo at Calyon Securities, the investment banking unit of Credit Agricole SA. “The DPJ is opposed to a foreign-currency reserve policy that is so wholly skewed to the dollar.”

The yen traded at 92.60 per dollar at 11:10 a.m. in Tokyo from 92.54 late July 10. It has gained 4 percent this month.

Japanese investors are the biggest foreign holders of Treasuries after China with $685.9 billion of the securities in April, according to the U.S. Treasury Department.

Nakagawa said Japan should consider purchases of new bonds issued by the IMF that will pay an interest rate pegged to the fund’s basket of currencies — the dollar, euro, yen, and pound — and known as Special Drawing Rights. The dollar is the principal component of SDRs. The IMF said this month it would issue bonds to its 186 members for the first time.

“We should start considering that as an option,” Nakagawa said. “I am not saying we should do it right away. If everyone starts doing it all of sudden, it may sway the dollar.” He didn’t say Japan should sell any of its dollar holdings.

China, India, Brazil, Mexico, and South Africa last week challenged the U.S. dollar as the primary denomination of world reserves. In China, whose foreign-exchange reserves probably topped $2 trillion for the first time in the three months to June 30, Premier Wen Jiabao this year said he was concerned that his nation’s dollar assets may decline as the U.S. sells record amounts of debt to fund stimulus spending.

Japan holds $1.02 trillion in foreign reserves, also the world’s largest after China’s. Losses on the holdings stood at about 21 trillion yen ($227 billion) at the end of May, according to the Finance Ministry’s estimate.

read more