Japan's rupiah reserves stir debate at home

Japan's rupiah reserves stir debate at home

TOKYO (Reuters): Japan's first intervention to help stabilize an Asian currency last month succeeded in making at least some impact in the market, but it also posed a key question to Tokyo: Should Japan hold an Asian currency in its foreign exchange reserves?

Japan sold U.S. dollars to buy the Indonesian rupiah in November, but the decision to hold a currency seen as less profitable, less liquid and riskier than the greenback has sparked criticism at home, economists said yesterday.

"I would say it is nonsense for a nation to hold a currency of a developing country as a reserve currency," said Sayuri Kawamura, senior economist at the Japan Research Institute.

Japanese and Singapore monetary authorities joined with Bank Indonesia to buy the rupiah against the dollar after the International Monetary Fund announced a rescue package for the crisis-hit nation. Later intervention by the Indonesian central bank, however, has had little success.

Since the joint intervention Japan has implied that it may take such action again, perhaps adding a second Asian currency to its growing external reserves.

Vice Finance Minister for International Affairs Eisuke Sakakibara said on Tuesday Japan would be prepared to intervene again in regional currency markets if help was required.

Our intervention some time ago was successful. We have been able to move exchange rates fairly significantly and we think this type of regional cooperation is very important, said Sakakibara, who was attending a meeting of Asian finance ministers in Kuala Lumpur.

Economist Kawamura said a nation with a floating foreign exchange system had to keep a certain volume of external reserves for use in emergencies, and this meant the U.S. dollar was still the most appropriate reserve currency.

The rupiah is the first Asian currency Japan has held as a reserve currency.

Officials say their intervention met with some success in the market at the time it was carried out, although the Indonesian currency later resumed its slide and on Wednesday hit a new record low of 3,940 to the dollar.

Some analysts said that holding Asian currencies benefits Japan by diversifying its portfolio, but others disagreed.

"If diversification is necessary, Japan should invest in more mark- or euro-based assets," said Kawamura.

Asked whether Japan's foreign reserves policy had changed since last month, a Ministry of Finance (MOF) official said on Monday its policy centered on liquidity and safety, but that there were other issues to consider as well.

MOF had said previously that Japan's foreign reserves were invested in U.S. Treasures and other foreign bonds and bank accounts based on liquidity, safety and profitability.

In contrast to the shift in Japan's reserve policy, the Bundesbank said last month the German central bank was still holding all of its currency reserves in U.S. dollars.

Takatoshi Itoh, professor at Hitotsubashi University, said holding the rupiah as a result of the joint intervention was justifiable because such buying seemed to have been based on a consensus among those involved in the IMF bail-out package.

Holding the rupiah was not against the national interest since it was bought in conjunction with IMF requirements for economic reform in Indonesia and the volume involved was reported to be limited, said Itoh, who chairs MOF's advisory panel on Asian currencies and financial sectors.

MOF has declined to give details of the value of the joint dollar sales for the rupiah in November, but they were estimated by traders at US$300 million to $500 million.

Despite depreciation in the value of its rupiah assets, Japan's external reserves rose $235 million from a month earlier to a record $228.385 billion at the end of November.