JBIC to use Japan FX reserves for dlr procurement

TOKYO, May 13 (Reuters) - Japan will start allowing the Japan Bank for International Cooperation (JBIC) to exchange its yen funds for dollars from the nation's foreign reserves for some of its dollar-denominated loans, the Ministry of Finance said on Tuesday.

The move will reduce the size of Japan's reserves, the world's second-largest at around $1 trillion, albeit marginally. The amount of dollars JBIC can procure from Japan's foreign reserves is expected to total less than 500 billion yen ($4.82 billion) in the fiscal year to next March 31.

Finance ministry officials said the step was aimed at giving JBIC more diversified and effective ways of procuring dollar funds for its loans.

JBIC, a government-backed lender that provides loans linked to overseas aid and overseas project finance for Japanese firms, now trades with private-sector banks when it needs to procure dollars to make any dollar-denominated loans. It can also issue dollar-denominated bonds.

But starting this month, it will also be able to procure dollars from Japan's foreign reserves.

While the ministry officials said the step was not aimed at reducing the reserves, some academics and analysts say Japan's foreign exchange reserves have become too big.

One problem is that the government has to issue financing bills to balance a special budget account that holds Japan's foreign reserves when the asset side of the balance sheet increases, at a time when Japan needs to tackle a mountain of public debt.

A ministry official said the step could help reduce issuance of such bills.

Japan's reserves ballooned after yen-selling intervention amounting to a record 20 trillion yen ($192.7 billion) in 2003 and a further 15 trillion yen in the first three months of 2004, as the government waged a campaign to prevent a rapid rise in the yen from derailing Japan's then-fragile economic recovery.