Private sector members of a key Japanese government committee said Thursday that Japan could use more of the huge surplus in its foreign exchange account to finance spending, considering that the country already has sufficient reserves to deal with sharp movements in the yen exchange rate.
This proposal, which was put forward during a meeting of the Economic and Fiscal Policy Council, comes at a time when policymakers are discussing ways to secure the necessary financing to cut taxes and implement spending plans, without increasing the already huge public debt burden.
The members said in a proposal that paves the way for the government’s preparation of the budget for the next fiscal year, which begins on April 1, that non-tax revenues and unused funds in government funds should be carefully evaluated and worked to secure them.
In particular, the proposal stressed the need to “effectively use” the surplus in Japan’s foreign exchange account as a source of financing spending.
Japan maintains about $1.2 trillion in foreign exchange reserves, including US Treasury bonds, in a special account used to carry out currency market interventions.
The surplus in this account has increased as a result of the depreciation of the yen, which increases the Japanese currency-denominated value of US Treasury bonds, as well as interest payments on foreign assets.
The Ministry of Finance sets guidelines specifying the percentage of surplus funds that should be kept in the account, to ensure the availability of sufficient foreign assets to sell when there is a need to intervene in the exchange market to support the yen against other currencies.
“Assuming exchange rates remain at approximately current levels, Japan has sufficient reserves to meet exchange rate risks at present,” the members said, adding that the country could use more funds from the private account without violating established guidelines.
Japan spent 15 trillion yen ($95 billion) on exchange market interventions between July 30 and August 26 to support the yen, which led to the largest ever decline in its foreign exchange reserves during August.
The possibility of using the account's funds has attracted interest as a potential way to finance Prime Minister Sanae Takaichi's plan to cut the consumption tax rate on food for two years, a move estimated to cost about 5 trillion yen annually.
The government's large spending plans sparked a sharp rise in bond yields during July, as a result of fears of an increase in debt issuance, which could exacerbate the already deteriorating financial conditions in Japan.
Since then, Takaichi has stressed her government's intention to pursue a "responsible" fiscal policy and limit debt issuance, by tapping into non-tax revenues, reviewing existing subsidies, and using revenues from private accounts and government funds.
The government also pledged to stop the annual practice of preparing an additional budget alongside the annual budget, to finance large economic stimulus packages.
However, in a sign of the possibility of relaxing this pledge, private sector panelists said Japan should not rule out preparing an additional budget when fiscal spending is needed to deal with economic shocks.
“Nikkei” rises ahead of the Bank of Japan’s decision
Japan's Nikkei stock index rose after Advantest improved its profit expectations, despite anticipation of the Bank of Japan's monetary policy decision and continued uncertainty about the business results of technology companies, which limited the market's gains.
The Nikkei index closed 1.1 percent higher at 64,659.47 points, in a session characterized by fluctuations, as trading began at an increase before the index briefly turned lower, following a decline in the shares of the South Korean company Samsung Electronics, despite recording record profits.
Advantest, which specializes in electronic chip manufacturing equipment and has a large weight in the index, led the Nikkei's gains, contributing about two-thirds of the 705-point gain during the session.
Other stocks related to electronic chips and artificial intelligence, which had declined during morning trading in Tokyo, also rose. “Tokyo Electron” shares rose by 2.4 percent, while “Soft Bank Group” shares rose by 1.8 percent.
The broader Topix index reversed its early losses, closing up 0.3 percent at 4,003.28 points.
Analysts at Jefferies wrote, in a research report, that semiconductor production equipment stocks “are currently facing difficulty in continuing to rise, amid concerns about the sustainability of growth in the future, in light of the rapid expansion in investments by giant cloud computing companies, and the huge investment and fundraising plans adopted by major artificial intelligence companies.”
They added, “Even in the scenario of a slowdown in investments related to artificial intelligence, we expect valuations to recover if the continued growth of the semiconductor markets related to artificial intelligence and their production equipment is confirmed.”
Japan, South Korea, and the United States are currently witnessing the season of announcing business results for technology companies.
On Wall Street, results were mixed the previous night. Alphabet announced a major depletion of cash, which pushed its stock to decline in extended trading after the close, while Microsoft recorded cash flows that exceeded expectations by a large margin.
Hundreds of Japanese companies are scheduled to announce their results on Thursday and Friday, while the Bank of Japan will issue its decision on monetary policy on Friday, amid economists’ expectations to keep interest rates unchanged.
Among the 225 companies listed in the Nikkei index, the shares of 132 companies rose, while the shares of 92 companies declined, while the shares of one company ended the session unchanged.
Hitachi shares fell by 9.8 percent, recording the largest relative decline among the components of the index, despite the company raising its profit expectations for the entire fiscal year in results it announced after the market closed, on Wednesday.
