Thoughts on Japanese and Swiss Reserve Figures

Japan and Switzerland released May reserve figures earlier today. They are both noteworthy, but for different reasons. Japanese reserves fell yet the BOJ did not intervene. Switzerland's reserves rose sharply as the SNB had to step up its intervention to defend its franc cap.

Japan's currency reserves fell by about $6.9 bln to $1.278 trillion. We can use the reserve data to do a little thought experiment. Let's assume that Japan holds only euros and dollars in reserves. Let's also assume that there were no interest payments or other increases in reserves. The euro lost about 6.6% of its value against the dollar, which is the currency that Japan's reserves are reported in. A 6.6% decline in the euro's value can translate into the $6.9 bln loss if the Japan held about 8.6% of its reserves or $104.4 bln in euro denominated securities.

 

This is simply a back of the envelop calculation, but it seems instructive. The proportion held in euros likely fell when the MOF/BOJ intervened unilaterally by more than $130 bln in H2 11. The intervention all reportedly took place against the dollar. Japan has reportedly been buying some EFSF issues, but relatively small amounts.

Switzerland also reported reserve figures for May. It reports its reserves in Swiss franc terms. Its currency reserves rose to CHF303.8 bln from CHF237.6 bln, an almost 28% increase in a single month.

An SNB official acknowledged that a large part of the jump in reserves was due to intervention. There is no reason to doubt that. However, valuation adjustments also likely played a role. As of the end of March, the SNB had indicated 51% reserves were in euros. The euro was little changed against the franc, so no valuation adjustment from it.

The dollar accounted for 28% of SNB reserves. The franc lost 6.6% against the dollar. So the dollar in reserves translates into more Swiss francs. This would have flattered Swiss reserves. The yen accounted for 9% of SNB reserves. Although this is a modest amount, the yen appreciated about 8.5% against the franc and this too would have bolstered SNB reserves reported in francs.

The SNB's sterling holdings (5%) and the slight out performance of sterling over the franc contributed a minor amount to reserves. The same can be said of the 4% share held in Canadian dollars. The SNB holds 3% of its reserves in an unspecified combination of Australian dollars, Swedish krona, Danish krone, Singapore dollars and Korean won. Minor valuation adjustments are likely from here too.