Japan’s foreign currency reserves log record drop in September

Japan’s foreign currency reserves dropped by 54 billion U.S. dollars to 1.238 trillion U.S. dollars at the end of September, marking a record monthly decline, the government said in a report Friday.

According to data from the Finance Ministry, the largest monthly drop since record keeping began followed Japan’s yen-buying, dollar-selling operation on Sept. 22, the first since 1998, to redress one-sided, rapid yen moves, as described by financial authorities here.

The ministry said securities, including U.S. Treasuries, fell to 985.27 billion U.S. dollars from 1.036 trillion U.S. dollars, marking a record monthly decline, while deposits, which can be used immediately for currency intervention, stood at 136.11 billion U.S. dollars.

Following the intervention, which reportedly cost a record 2.84 trillion yen (19.61 billion U.S. dollars) and the assets of which used remain unknown, the dollar dropped to the 140 yen zone after crossing the psychologically important 145 yen mark.

While Japan’s Finance Minister Shunichi Suzuki said the currency intervention had a “certain effect” and Japan would intervene in the market again if necessary, financial analysts here said that the intervention would have a limited effect in countering the strength of the U.S. dollar versus the yen.

This is due to a growing interest rate gap between the Bank of Japan and the U.S. Federal Reserve, they said.

The Fed, in stark contrast to the BOJ, has been aggressively hiking its rates to combat soaring inflation.

Market players, however, are closely watching currency moves to see if the Japanese government and the BOJ will conduct another intervention should the yen again substantially weaken.