FACTBOX-Japan's foreign reserves and reserves management

(For a story on Japan's reserves management, click [ID:nT446])

Aug 11 (Reuters) - Some facts about Japan's foreign exchange reserves and its management policy.

RESERVE 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 foreign exchange market, it instructs the Bank of Japan to do so on its behalf.

-- The Ministry's guidelines unveiled in April 2005 say 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. If 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. To view the guidelines, see the Ministry of Finance website: here

-- In July, the Ministry started operating a new section within its foreign exchange markets division that will focus on managing Japan's massive foreign exchange reserves. But ministry officials say the launch of the new section does not mean Japan will start investing the stockpile more actively into risky assets to seek higher returns. [ID:nT343958]

-- The MOF resists the idea of setting up a sovereign wealth fund to manage the reserves, partly for fear that investing in high-risk, high-return assets could lead to losses.

-- Some ruling party lawmakers called for the creation of such a government investment vehicle to manage part of the reserves. But considering the potential market impact, they have grown more cautious and shifted its debate to managing public pension money via such a fund. [ID:nT156136] [ID:nT219922]

-- While the MOF 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, the ministry has been diversifying the range of dollar-denominated assets.

-- It has also been buying and selling securities in the secondary market, using private brokerages, rather than simply buying new issues and holding them to maturity.

-- Japan has been lending securities from its foreign reserves as a way to provide liquidity to bond markets overseas and more effectively manage its reserves. [ID:nT149406]

-- In its first detailed disclosure, the MOF said last November that income gains from the reserves amounted to 3.692 trillion yen ($33.68 billion) in fiscal year that ended in March 2007, with interest on investment assets averaging 4.0 percent.

JAPAN'S FOREIGN RESERVES

-- The foreign reserves stood at $1.0047 trillion at the end of July, the world's second largest after China. [JPRES=ECI]

-- Japan's foreign reserves ballooned after massive yen-selling interventions in 2003 and early 2004 as Tokyo tried to keep a rapid rise in its currency from derailing a fragile economic recovery and accelerating deflation.

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

-- Tokyo has stayed out of the market since March 2004, the longest Tokyo has gone without intervention under current records dating back to 1991. But the reserves have grown slowly on interest rate income.

-- Eligible assets for the reserves include central government bonds, agency bonds, supranational bonds and securitised bonds that offer high liquidity and certainty of redemption, as well as deposits in foreign central banks and financial institutions at home and abroad with high credibility.

-- Tokyo does not hold stocks or real estate in its reserves.

-- The MOF said in May it would 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, a step that will effectively reduce the size of Japan's reserves slightly. [ID:nT242570] The step followed the decision last year to start using dollars from the external reserves for overseas remittance by the government. ($1=109.62 Yen)