Reserve managers reveal penchant for the yen

By:
Peter Garnham
Published on:

Figures from the IMF show that the world’s reserve managers have built up their holdings in the yen to levels last seen before the collapse of Lehman Brothers.

The IMF’s quarterly Cofer data, which tracks the size and currency allocation of the world’s FX reserves, revealed that holdings rose to a fresh record of $11.1 trillion in the first quarter.

The dollar remains the reserve currency of choice, accounting for 62.2% of central bank stockpiles.

Meanwhile, the data also showed that global central banks’ love for the euro continues to wane, with the currency accounting for 23.7% of allocated reserves – the lowest since the second quarter of 2004 and well off the high of 28% recorded in the third quarter of 2009.

Aroop Chatterjee, strategist at Barclays, says although euro accumulation was positive in the first quarter, it appears emerging market (EM) central banks are unwilling to add euro reserves at the levels seen before the debt crisis in the eurozone.

EM central banks sold €18 billion of reserves during the fourth quarter of 2012 and €56 billion over the full year, but, as the chart below shows, the euro represented 11% of new reserves in the first quarter of 2013.

“With the European Central Bank’s commitment to reduce fragmentation in eurozone markets, existential risks for the euro have declined over time and have likely reduced the pressure on central banks to sell their reserves,” says Chatterjee.

“However, this appears to be limited comfort for the global central banking community, which seems to have dialled down the share of the euro [in their reserves] from a pre-crisis average of 23% from 2006 to 2010, to 11% presently.”   

Average currency allocation on a flow basis by EM central banks ($billion) 
 

One currency that did find favour with reserve managers, however, was the yen, which dropped sharply in the last few months of 2012 and the first quarter of 2013 as the newly elected Japanese prime minister Shinzo Abe promised action to reflate the economy and fight strength in the currency.

The currency values used by the IMF in the data showed a 21.3% rise in the dollar against the yen during the fourth quarter of last year and the first three months of 2013.

Despite that sharp move, the nominal reserve holdings of the yen only fell from 4.2% at the end of the third quarter of 2012 to 3.9% in the first quarter of this year. That means in constant FX terms there was a jump in yen holdings from 2.9% at the end of the third quarter of last year to 3.2% at the end of the first quarter of 2013.

Central bank yen holdings in constant terms have thus risen from a low of 2.4% in the fourth quarter of 2011 to, at 3.2%, their highest level since the collapse of Lehman Brothers in the third quarter of 2008.

Indeed, looking at the change in constant yen holdings on an annual basis, the annual quarterly average increase during the last four quarters – 23.3% – is the largest on record.

Derek Halpenny, head of global markets research at Bank of Tokyo-Mitsubishi UFJ, says that is a clear indication of renewed central bank appetite for the yen, despite the plunge seen in the currency since last November.

“It may be that yen holdings were deemed very low and central banks took the opportunity to increase holdings as the yen cheapened,” he says.

Halpenny acknowledges that the buying reflected in the IMF data preceded the Bank of Japan’s April meeting, at which it announced a massive fresh wave of quantitative easing.

“But it could be viewed at least as a vote of confidence in Abenomics that might well lift growth prospects without substantially weakening the yen further,” he says. 

Surge in central bank demand for the yen