Japan’s foreign exchange reserves fall by record $54bn

Japanese foreign exchange reserves fell by a record amount in September and China’s dipped closer to $3tn as the surging dollar hit two of the world’s most significant pools of central bank assets.

Japan’s foreign reserves dropped by a record $54bn to $1.24tn after authorities spent nearly $20bn last month to intervene in currency markets to stem the yen’s fall. The decline was also driven by the falling value of the foreign bonds in Japan’s portfolio.

In unusual remarks on the foreign exchange rate by a prime minister, Fumio Kishida told parliament on Friday that “sharp, one-sided yen declines are undesirable”.

Japan’s foreign reserves are at their lowest level since 2017, as markets resumed testing the yen’s ¥145 level against the US dollar.

The foreign reserves of emerging markets in Asia have declined by more than $600bn in the past year, the biggest decline on record, Standard Chartered wrote in a note.

FX reserves cover in months of imports has deteriorated “to the lowest level since the global financial crisis for [emerging markets] Asia-ex China,” said Standard Chartered. “Against this backdrop, central banks may choose a more judicious use of FX reserves going forward.”

In China, total foreign exchange reserves were $3.029tn in September, data from the State Administration of Foreign Exchange showed, down from $3.055tn a month earlier and their lowest level this year.

China’s reserves, the largest of any country in the world, have come under scrutiny following the sharp depreciation of the renminbi on the back of a stronger dollar and interest rate rises in the US.

The renminbi broke through the level of Rmb7 per dollar in September before touching its lowest level since 2008 last week, posing a challenge to Chinese policymakers as they grapple with weak economic growth and a property crisis that has stunted construction activity across the country.

Safe officials said in a statement that the decline in reserves was driven by falling asset prices caused by a stronger dollar.

State banks have been buying renminbi and selling the dollar at high levels, suggesting that they had been encouraged to do so by the authorities, said a Shanghai-based trader.

“The apparent lack of direct FX intervention doesn’t mean the [People’s Bank of China] is letting the renminbi go,” said Julian Evans-Pritchard, senior China economist at Capital Economics.

Evans-Pritchard suggested that Beijing was instead “pushing back via other means”, pointing to reports of state banks being encouraged to deploy their resources to support the currency.

Officials have also recently introduced other measures to indirectly support the currency, including rules that discourage bets against it through derivatives contracts by requiring banks to post reserves at the central bank when providing such trades.

China’s FX reserves rose dramatically from just over $1tn in 2007 to $4tn in 2014, but have remained stable at about $3tn from 2017 onwards.

Additional reporting by Cheng Leng in Hong Kong and Wang Xueqiao in Shanghai