Japan is taking a hard look at the world’s second-largest foreign exchange war chest. The government plans to review how it manages roughly $1.3 trillion in reserves, a move that could ripple across global currency and bond markets.
The review comes under Prime Minister Sanae Takaichi, whose administration faces a familiar problem: how to pay for things when you’re planning to cut taxes. With the government exploring suspending or modifying its consumption tax, an annual revenue gap of approximately 5 trillion yen needs filling. Those massive reserves, swollen by years of yen depreciation, suddenly look like a very tempting piggy bank.
What’s actually in the reserves
Japan’s foreign exchange holdings sit in the $1.3 to $1.4 trillion range, making them second only to China’s. The composition is about what you’d expect from a cautious central banking apparatus: predominantly US Treasuries, with smaller allocations to deposits, gold, Special Drawing Rights, and IMF positions.
These reserves exist for a very specific reason. They’re Japan’s insurance policy against currency volatility, a tool the government can deploy to defend the yen when markets get ugly. Japan has intervened in currency markets before, most notably selling dollars to prop up the yen during periods of sharp depreciation.
