Financing and Investment of Funds for Foreign Exchange Intervention

This section will briefly explain how interventions are financed as well as the basic policy for the investment of foreign exchange reserves, which have been accumulated partly as a result of interventions.
Intervention by the Bank of Japan as the agent of the Minister of Finance is conducted by the account of the Japanese Government, which is called the Foreign Exchange Fund Special Account (hereafter FEFSA).8 This fund consists of foreign currency funds and yen funds. In case of U.S. dollar buying/yen selling intervention, for example, the yen funds to be sold are raised by issuing Financing Bills (FBs). In the event of U.S. dollar selling/yen buying intervention, U.S. dollar funds held in the FEFSA are used for buying the yen in the markets.
The Japanese Government holds large amounts of foreign currencies in the FEFSA, partly as a result of foreign currency buying/yen selling interventions in past yen appreciation phases. The Minister of Finance makes decisions on investments of these currencies paying careful attention to liquidity and safety. Most of these funds have been invested in securities issued by the authorities of major industrial countries, which are almost immune from liquidity risk. The back office also plays a role in the implementation of such foreign currency funds investment.
8 The FEFSA system consists of two elements: the Foreign Exchange Fund and the narrowly defined Foreign Exchange Fund Special Account. The former is a fund prepared for foreign exchange trading by the Government. Purchases/sales of foreign exchange by this fund are not recorded as the revenues/expenses of the Government. In the latter, results of trading such as (1) profits/losses arising from foreign exchange trading and (2) payment/receipt of interest arising from fund-raising/investment accompaning foreign exchange intervention are recorded as the revenues/expenses of the Government.