Japan’s dollar reserves and repatriation

CNBC has a good summary of foreign dollar reserves and what happens when a country (in this case Japan) might want to use some of those reserves:

“To raise cash, you sell some of your assets, maybe those US Treasuries.  But when you sell a dollar-denominated asset, you receive your payment in dollars. So if you sell a pile of US treasuries, you get a pile of US dollars as a payment.

But you can’t pay your construction workers in dollars. You can’t buy your building supplies locally in dollars. You need yen. So you use your dollars to buy yen.  Now imagine that happens en masse with millions of people, businesses and insurance companies. All of those people and companies are buying yen. That is a huge increase in demand.”

The value of the yen would skyrocket versus the dollar resulting in significant financial losses to Japanese export businesses.

According to the US Treasury, Japan’s holdings of US Treasury debt were $907 billion at the end of April 2011.  This number has been gradually increasing for many years, due to Japan’s trade surplus versus the US.

Given the immensity of the destruction from the earthquake, tsunami, and nuclear disaster unfolding in Japan, it is not unreasonable to expect that a significant amount of funds held by Japanese institutions and the public held in dollar assets may be liquidated to provide cash for rebuilding and operating.

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