- U.S. bond liquidity concerns investors as Fed raises rates
- Japan official declines to comment to avoid affecting markets
Japan has stockpiled a record amount of cash at central banks as part of its currency reserves, after selling Treasuries, as policy makers around the world adjust to rising U.S. interest rates and falling bond-market liquidity.
Foreign-exchange deposits in the vaults of overseas institutions ballooned to $124.1 billion as of Jan. 31, from $14 billion at the end of 2014, according to data from Japan’s Ministry of Finance. That’s the most based on figures going back to 2000, and accounts for about 10 percent of the nation’s total reserves. While the figure isn’t broken down, it coincides with a surge in greenbacks held by global central banks at the U.S. Federal Reserve.
Any shift away from Treasuries would protect Japan’s reserves from potential losses as the Fed extends monetary policy tightening and concerns rise over bond-market liquidity. Dollar holdings kept in cash stand to benefit from higher U.S. interest rates and a stronger currency, even as monetary authorities in Japan and across Europe start charging banks for some deposits.
“Everybody’s devaluing their currencies, everywhere across the planet, except the U.S. dollar,” said John Gorman, the head of U.S. debt trading for Asia and the Pacific in Tokyo at Nomura Holdings Inc., the nation’s biggest brokerage. “People are more comfortable putting their reserves in a currency that’s appreciating rather than a currency that’s depreciating.”
An official in the office of foreign exchange reserve management in the Ministry of Finance declined to comment on the matter, saying it can affect markets.
The increase in Japan’s cash at foreign institutions is a change in the composition of the country’s foreign-exchange reserves. The overall stockpile, the world’s largest after China’s, has fallen almost 3 percent to $1.19 trillion since it reached a record at the start of 2012.
Japan, America’s largest overseas creditor after China, is cutting its Treasuries position. The stake among both government and private investors dropped 8.8 percent in 2015, the first sales since 2007, based on the most recent Treasury Department data.
The reduction dovetails with a decline in foreign securities in Japan’s foreign exchange reserves. Since November 2014, bond holdings fell $126.4 billion, while deposits rose $116.9 billion.
The strategy of selling Treasuries and holding dollars would allow investors to get out of older U.S. government securities that can be difficult to trade and may get even tougher to transact if the Fed raises rates further.
Declining liquidity in the Treasury market is driving demand for the newest, easiest-to-sell securities. When policy makers increased benchmark borrowing costs in December, they indicated they will act four more times in 2016. Even so, the Bloomberg U.S. Treasury Bond Index has advanced 3.4 percent so far in 2016 in a flight from riskier assets.
“Asian central banks in general have been expressing concerns about liquidity of their holdings of seasoned Treasury securities,” said Lou Crandall, the chief economist at Wrightson ICAP LLC in Jersey City, New Jersey, and a former economist for the Fed. “Japan built up its liquidity cushion through selling Treasuries and increasing cash at the Fed. It’s a little surprising that more foreign central banks haven’t taken the same route.”
Japan’s switch into holding more cash as part of the country’s reserves came as assets in the Fed account used by central banks to park dollars surged. Funds in the so-called foreign reverse repurchase agreement pool rose to a record $246.6 billion as of Feb. 17, capped by a 95 percent increase last year, based on Fed data.
The New York Fed probably raised the rate it pays foreign central banks on their overnight borrowings to an average of about 0.13 percent in the fourth quarter of 2015, according to estimates by Wrightson’s Crandall.
The rate averaged 0.09 percent in the first nine months of 2015, up from 0.03 percent during the same period of 2014, based on the U.S. central bank’s quarterly financial statements. One-month Treasury bill rates averaged 0.07 percent from Oct. 1 to Dec. 31.
Countries hold money abroad to insure they have access to funds to make international payments and in case of an emergency. In Japan’s case, these funds surged in 2003 as the central bank sold yen, trying to boost demand for its exports and strengthen its economy. It used yen to buy foreign currencies, increasing its reserves.
The same thing happened in 2011 as Japan ramped up yen sales to record levels. A 6.6 percent yen rally this year against the dollar led to speculation authorities will intervene again to halt its gains.
The dollar is the most commonly held currency among foreign exchange reserves, accounting for $4.22 trillion, or 64 percent, of stockpiles from nations that report on the composition of their holdings, according to the International Monetary Fund. Japan’s allocation to the dollar is probably at least that much, said Hiroki Shimazu, the senior market economist in Tokyo at SMBC Nikko Securities Inc.
The authorities will probably leave the money in the U.S., he said. “It will push up the yen” if they bring the funds home, he said. “That’s not favored at this time.”