* Japan wants to manage vast reserves better
* Government to propose changes to law to remove hurdles
* Govt will tread carefully to avoid big market impact
TOKYO, Oct 13 Japan is looking to allow private
sector funds and trust banks to manage a part of its
$1.27-trillion pool of foreign exchange reserves in a drive to
manage them better, a government source told Reuters on Sunday.
Until now the government has managed the foreign exchange
reserves itself, but its ability to do so has been stretched as
the reserve roughly doubled over the past decade, thanks to
massive yen-selling interventions to weaken Japan's currency.
The government needs to clear legal hurdles on its use of
foreign exchange assets if it wants to draft in the services of
private financial institutions and will propose amending the law
during a parliamentary session that begins on Tuesday.
The government is now restricted to lending its foreign
securities only to banks, but the new law will also permit
brokerages to borrow securities, the source said, with the fees
borrowers pay going to replenish government coffers.
"Although we do not think the Japanese government will
outsource all of the foreign exchange reserve to the private
sector, even just a 10 percent outsourcing will become a $120
billion business," Tohru Sasaki, head of Japan rates and FX
research at JP Morgan Tokyo, told clients in a note.
The government will not alter its stance of investing the
bulk of its foreign exchange reserves in U.S. Treasuries and
other high-grade investment bonds, and it will allow private
sector institutions to manage only a few percent of the
reserves, the Nikkei business daily reported on Sunday.
"While there is no detail about the plan, we do not think it
will have an impact on the FX market, because the government
knows that it will have a significant market impact if they
change the currency composition significantly," Sasaki added.
Japan is the world's second largest holder of foreign
currency reserves after China, which held about $3 trillion by
August, according to IMF data.