Japan advisers urge tapping foreign exchange account surplus to fund spending

The proposal would redirect some unused money from Japan’s foreign exchange special account toward government spending. It is designed to help finance tax cuts and other plans without adding as much to Japan’s already enormous debt pile. Private-sector members of the Council on Economic and Fiscal Policy made the recommendation as the government prepares next year’s budget.

The account holds roughly $1.2 trillion in foreign reserves, including U.S. Treasury bonds. Its surplus has grown because a weaker yen raises the yen value of those dollar assets, while the assets also generate interest. The advisers said Japan could use more surplus funds while still following the Finance Ministry’s retention guidelines.

The proposal does not mean the entire account would be spent. It says that, with exchange rates near current levels, Japan has sufficient buffers for now. The idea could help fund the proposed food-tax cut, estimated at roughly 5 trillion yen annually, while limiting new borrowing. However, the panel also said extra budgets should remain possible during economic shocks.

Japan’s foreign exchange special account is a government fund containing foreign reserves, including U.S. Treasury bonds. It supports the country’s ability to intervene in currency markets. When the yen comes under pressure, the account provides foreign assets that can be sold to buy yen and help prop up its value.

The account holds roughly $1.2 trillion in foreign reserves. The Finance Ministry sets guidelines for how much surplus must remain there. Those rules are meant to ensure Japan has enough foreign assets available for future interventions. The account’s surplus has expanded as the yen weakened and foreign assets became worth more in yen terms.

Maintaining the account creates a financial buffer, but it also leaves money that policymakers may want to use elsewhere. Advisers said current exchange rates leave sufficient protection against exchange-rate risks for now. They therefore recommended tapping more surplus without breaching the ministry’s guidelines, while preserving the account’s intervention role.

Japan’s foreign reserves are roughly $1.2 trillion. The proposed two-year consumption-tax reduction for food items is estimated to cost about 5 trillion yen each year. These figures describe different things: reserves are a large accumulated stock of assets, while the tax-cut cost is an annual spending requirement.

Using the article’s exchange rate of 157.8700 yen per dollar, $1.2 trillion converts to approximately 189 trillion yen. That is about 38 times the proposed annual cost of the food-tax cut. The comparison shows the account’s enormous scale, although not all reserves are necessarily available for spending because some must remain as an intervention buffer.

The advisers said Japan can tap more surplus funds while staying within the Finance Ministry’s guidelines. This could provide a significant funding source for the tax cut. Still, the proposal concerns surplus money, not the wholesale use of Japan’s foreign-reserve holdings, and currency risks remain part of the calculation.

Japan’s foreign-exchange account holds assets such as U.S. Treasury bonds, which are denominated in dollars. When the yen weakens against the dollar, each dollar converts into more yen. Even if the dollar value of the Treasuries does not change, their recorded yen value rises. That increases the account’s surplus in yen terms.

For example, a Treasury asset worth one dollar produces more yen when the exchange rate moves from a stronger yen to a weaker one. The article also identifies a second source of growth: interest payments from the foreign assets. Together, currency valuation gains and interest income have expanded the surplus.

This growth has made the account an attractive possible funding source. The advisers said current exchange rates leave Japan with enough buffers against exchange-rate risks for now. The Finance Ministry can therefore permit more surplus to be used, provided the remaining assets still meet its intervention guidelines.

Japan’s spending plans had already raised concern that the government would issue more debt. Those fears contributed to a spike in bond yields in July. Funding some spending from the foreign-exchange account surplus could reduce the amount the government needs to borrow, rather than adding all new costs to its debt pile.

The proposed food-tax cut illustrates the issue. It is expected to cost roughly 5 trillion yen per year. If surplus funds cover part of that cost, the government could avoid financing the full amount through additional bond issuance. Lower expected issuance could reduce concerns about worsening Japan’s already troubled finances and may lessen upward pressure on yields.

The article presents this as a funding strategy, not a guaranteed market outcome. Investors could still react to broader spending plans, debt concerns, and future budgets. The panel also said Japan should not rule out extra budgets during economic shocks, suggesting borrowing pressures may not disappear entirely.

Japan maintains foreign assets because they give the government tools to influence the yen’s exchange rate. If the yen falls sharply, officials can intervene in currency markets to support it. The foreign-exchange special account holds the assets needed for that operation, including U.S. Treasury bonds.

The mechanism is straightforward. Japan sells some foreign assets, receives foreign currency, and uses the transaction to buy yen. This can help prop up the yen against other currencies. The article reports that Japan spent 15 trillion yen on interventions between July 30 and August 26, causing the largest-ever monthly drop in its foreign reserves in August.

That intervention history explains why the account cannot simply be emptied. The Finance Ministry sets retention guidelines to preserve enough assets for future action. Advisers said current exchange rates provide sufficient buffers for now, allowing more surplus to be used without breaching those guidelines.

Exchange rates change the yen value of foreign assets even when the assets’ foreign-currency price stays unchanged. If Japan owns a U.S. Treasury bond worth one dollar, a weaker yen means that dollar converts into more yen. The bond therefore appears more valuable when measured in Japan’s currency.

The article identifies this effect as a reason the foreign-exchange account’s surplus has grown. Japan holds roughly $1.2 trillion in foreign reserves, including U.S. Treasuries. As the yen depreciated, the yen-denominated value of those holdings increased. The assets also produced interest payments, adding another source of surplus.

For public finances, a larger surplus can offer a potential alternative to borrowing for spending. Advisers argued that Japan could tap more of it while retaining enough assets for intervention. However, the higher value is partly an exchange-rate effect, and the government must still preserve buffers against future yen volatility.