February 15, 2008

Japan Forex Reserves Growing "Suspiciously Fast"

Stephen Jen of Morgan Stanley's Global Economic Forum team says:

"Japan’s reserves are growing suspiciously fast. Japan’s foreign reserves expanded from US$946 billion in September 2007 to US$996 billion in November, an increase of US$50 billion in four months. Assuming a 2.5-3.0% return on the underlying assets, Japan should only be enjoying US$25-30 billion in annual investment earnings, or US$6-8 billion a quarter. Further, it is widely assumed that Japan has the bulk (90%) of its reserves in USD, and the MoF never diversified away from USD. With such low holdings of EUR, valuation changes – from the rise in EUR/USD – should not have been a major factor generating gains in reserves. Indeed, what is embedded in our reserve tracker file assumes 90% USD holdings. Our presumptive calculations identified a US$13.7 billion gain during September-January due to the returns on the underlying assets, and another US$18 billion from valuation changes, leaving US$18 billion of the reserve increases unexplained by our metric. Could the MoF have conducted secretive interventions worth US$18 billion? "

Morgan Stanley believes the net result is not stealthy intervention but skillful day trading of Yen/Euro positions and that the data reveals Japan is diversifying away from the US Dollar to over 20% Euro composition in its foreign exchange reserves.

If true, this raises another interesting question: Is America's loyal Asian satellite dumping the Dollar?

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