Commentary on Political Economy

Wednesday 16 December 2020


Bank of Japan lines up $6bn in dollar ammunition

The move is the BoJ’s latest innovative measure aimed at helping Asia’s largest advanced economy weather the coronavirus shock © AP

The Bank of Japan is to buy $6bn from the country’s national foreign exchange reserves in an unusual move to boost the central bank’s US currency holdings.

The BoJ said it would make its first ever outright purchase from the Ministry of Finance at some point between now and the end of March, at the prevailing exchange rate when the transaction takes place.

The central bank’s decision may signal that it intends to step up its longer-term lending of foreign currency to domestic banks, although bank officials insisted they had no immediate plans to use the dollar cash.

The move is the latest innovative step by Japan’s central bank, which has created a massive programme of low-cost loans to help Asia’s largest advanced economy weather the coronavirus shock.

The BoJ has ¥6.7tn ($65bn) in foreign currency assets on its balance sheet. They include contributions to multilateral organisations as well as a special longer-term dollar lending facility for Japanese banks, which has been in place since 2012 and which the central bank could use the extra dollars to expand.

Central bank officials said the purchase was a one-off to satisfy the BoJ’s own needs, and it would continue to use its dollar swap lines with the US Federal Reserve to provide broader liquidity to the market in times of stress. They said the BoJ avoided buying dollars in the market in order to not give the impression of yen intervention.

But analysts said access to the $1.3tn in foreign exchange reserves controlled by Japan’s finance ministry could also provide the BoJ with an alternative source of dollar funding.

The BoJ move means that, in theory, it would not need to strike emergency swap agreements with the Fed in the first two months of the new year, during a potentially fraught handover period from the Trump administration to that of president-elect Joe Biden.

The yen was little moved on Wednesday following the BoJ’s announcement, edging higher against the dollar to ¥103.42 but sticking to the tight range in which the pair have traded since early November.

Tohru Sasaki, head of research at JPMorgan in Tokyo, said that while there were no immediate market implications, the BoJ’s move was pre-emptive so that in the event of another dollar liquidity crisis, the central bank did not need to be as reliant on the Fed as it was in March and April as the pandemic emerged.

“The BoJ’s holdings of US dollars are not so large, so it is a good idea to increase them. Also, the government needs yen for its supplemental budget . . . so it’s good for both sides,” said Mr Sasaki. “If the BoJ has enough liquidity in dollars it doesn’t need to rely on the Fed.”

Although the BoJ’s announcement coincides with a resurgence of Covid-19 cases in Japan and speculation over the future of Tokyo’s campaign to stimulate domestic travel and dining, analysts said it did not appear directly linked to specific concerns over the pandemic.

“It is a preparation for uncertainty. If it is a one-off action, then it shouldn’t have too much impact,” said Shusuke Yamada, chief forex and equity strategist at Bank of America. “If not, then it could have implications for the way they [Ministry of Finance] manage the reserves. It is interesting timing.” 

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