FACTBOX-Japan's foreign reserves and reserves management

(For a story on Japan's stance on foreign reserves management, click on [ID:nT339810]. For an analysis on foreign reserves management that ran in May, click on [ID:nT358426])

June 29 (Reuters) - Some facts about Japan's foreign reserves and its management policy.

FOREIGN RESERVES MANAGEMENT POLICY

-- The Ministry of Finance is in charge of Japan's currency policy and the management of its reserves. If the ministry wants to intervene in the market, it asks the Bank of Japan to do so on its behalf.

-- The MOF's guideline unveiled in April 2005 says the objective of reserves management is to ensure sufficient liquidity to be prepared for purchases and sales of foreign exchange needed to ensure a stable yen. It also says the reserves should be managed with maximum attention given to safety and liquidity. Under these constraints, profitability should be pursued.

-- It also says a top priority is to avoid distorting the market.

-- Given such principles, eligible assets for foreign reserves investment include central government bonds, agency bonds, supranational bonds and securitised bonds, which offer high liquidity and certainty of redemption. As for deposits, the MOF places them at foreign central banks or domestic and foreign financial institutions that have high credibility and the ability to provide liquidity.

-- Over the past few years, the MOF has been diversifying the types of dollar-denominated assets in the reserves and has also shifted to a more active management approach from its traditional buy-and-hold policy. It now buys and sells securities in the secondary market, using private brokerages, rather than only buying new issues and holding them to maturity.

-- But the MOF has repeatedly said it has no plan to divert dollars out of the reserves into other currencies such as euros as that would precipitate a fall in the dollar, which is not in Japan's interests.

-- The ministry is resisting the idea of setting up a new investment agency to manage the reserves, keeping its distance from China's plans to establish such a vehicle to more effectively manage part of its $1.2 trillion of reserves.

BACKGROUND ON FOREIGN RESERVES

-- Japan's foreign reserves totalled $911.137 billion at the end of May, down from a record $915.623 billion a month earlier. But the amount is still second only to that of China, which holds more than $1 trillion of such assets. For a table of main figures for end-April foreign reserves click on [ID:nT266748].

-- The currency breakdown of Japan's external reserves is not disclosed, but historical data on the country's currency intervention, which has mostly taken the form of dollar buying, suggests that most of Tokyo's hefty reserves are in dollars.

-- These reserves ballooned after yen-selling intervention worth a record 20 trillion yen ($162 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.

-- Tokyo has stayed out of the market since March 2004 -- the longest Tokyo has gone without intervening under current records dating back to 1991.

-- The reserves have grown slowly on interest rate income from foreign bonds and deposits in reserve holdings. In recent months, a rise in the euro has also helped raise the overall reserves by boosting the dollar value of euro-denominated reserve holdings.