Japan Estimates Reserve Reval Losses at $187B

♠ Posted by Emmanuel in , at 3/27/2008 04:06:00 PM
Here is a perfect illustration of the so-called balance of financial terror inherent in export-reliant Asian economies accumulating excess reserves. The Japanese FinMin Fukushiro Nukaga suggests that Japan has breathtaking unrecorded losses on its FX dollar assets which were acquired when the yen was rather weaker. It's a lose-lose situation for them: accumulate more dollars which have a tendency to go nowhere but down and you get losses of this magnitude ($187B). OTOH, slowing down the rate of accumulation of dollar assets and you face an even steeper loss on accumulated dollars as the wretched currency plunges at an even faster pace. To extend the Cold War analogy, I see this system as one of Mutually Assured Financial Destruction (MAFD), with America becoming a distinctly subprime economy. Before I get more carried away with this military-industrial complex, just read the following Reuters article:

Unrealised losses on Japan's $1 trillion foreign currency reserves amount to about 18.5 trillion yen ($187.2 billion) when the dollar is around 100 yen, Finance Minister Fukushiro Nukaga said on Thursday. Nukaga again declined to comment on specific levels but said a strong yen could benefit the Japanese economy in the long run as it will bring down the country's import costs.

The dollar fell to a 13-year low below 96 yen earlier this month as the U.S. credit mess deepened, increasing valuation losses on Japan's external reserves, which are thought to be mostly made up of dollar assets. On Thursday it traded around 98.9 yen.

Japan intervened heavily in the currency market in 2003 and early 2004 to help the economy tackle deflation. It sold a total of 35 trillion yen for dollars in the 15 months to March 2004, during which the dollar traded between 105 and 120 yen.

"Unrealised losses are certainly increasing. The amount of losses is estimated at around 18.5 trillion if the dollar is at 100 yen," Nukaga told parliament. He defended the government's stance of sticking with the dollar, saying if Japan had sold the dollar it could have had an unexpected outcome on currency markets.

Nukaga also declined to say if he is considering intervening in currency markets and repeated the ministry's stance that currencies should reflect economic fundamentals and excessive moves are undesirable. "I've made it clear that I see last week's currency moves as excessive," Nukaga said when asked about the recent fall in the dollar.

Asked about the impact of the yen's rise on Japan, the world's second-biggest economy, Nukaga said it has both benefits and ill effects but will help the economy in the long run. "If the yen rises, goods will be coming into the country cheaply and could turn the economy for the better while benefiting Japanese consumers, although it could hurt exporters. "I think it would be good in the medium to long run," he said.

Nukaga also said he expects Japan's economic recovery to pick up pace eventually but is closely watching developments in the U.S. economy and financial markets. "Japan's economic recovery is at a standstill," he told a financial committee of parliament's upper house.