January 25, 2010 / 8:10 AM / 10 years ago

UPDATE 1-Japan's Kan unsure appropriate size of FX reserves

(For more stories on the Japanese economy, click [ID:nECONJP])

* Japan’s FX reserves at $1.0494 trln, near record high

* Democrats have supported more active FX reserve management

* Kan says difficult to use reserves to fund fiscal spending (Recasts)

By Stanley White

TOKYO, Jan 25 (Reuters) - Japan’s finance minister said on Monday it is necessary to consider what amount of currency reserves is appropriate as there are differing views on how big they should be.

Naoto Kan told parliament the government cannot easily dip into the reserves to fund its spending as that would involve selling foreign assets and could lead to a rise in the yen.

Lawmakers in the ruling Democratic Party, which took power in September, have called for more active management of Japan’s reserves, the world’s second-largest after China’s.

Kan’s comments suggest the government will go slowly in any reform of reserves management and may be reluctant to use the funds to relieve the country’s debt burden.

“I cannot say there’s a consensus on the necessary amount of currency reserves, so this is something we should consider,” Kan told the budget committee of parliament’s lower house.

“But our currency reserves aren’t organised in a way that you can simply pull money out.”

Japan’s foreign reserves stood at $1.0494 trillion at the end of December, according to Ministry of Finance data, just below a record high of $1.0737 trillion in the previous month. The bulk of Japan’s reserves are believed to be held in dollar-denominated assets.

The next update on the size of the reserves will be issued in the first week in February.

Kan has asked other cabinet ministers to examine reserves in special accounts for public works to see if they can be used when compiling budgets.

Past governments have tapped into special accounts held by ministries to help cover budget deficits, but the special account for foreign reserves is thought unlikely to be used in that way.

Japan’s outstanding debt is approaching 200 percent of gross domestic product, the worst ratio among major economies, and the government’s ability to spend is limited after it compiled a record budget for the fiscal year starting on April 1.

The government would need to consider the risks of yen appreciation should Japan try to sell the foreign assets in its reserves, Kan said. A stronger yen could threaten the economic recovery by eroding exporters’ earnings.

Kan reiterated that it is up to foreign exchange markets to determine the level of currencies. The yen slid earlier this month when he said after becoming finance minister he hoped it would weaken further. (Editing by Michael Watson)

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