Foreign Exchange Reserves and Crisis - The Case of Japan

Abstract

High foreign exchange reserves (FER) are often cited as a positive factor for a country in the financial media and in academic publications alike. They convey the images of stability, trust and strength, not only in an economic, but also in a political sense.Worth more than US$ 1,000 billion, Japan's FER rank second highest in the world after those of China. This paper will look into the development and functions of these reserves. It will inquire how they built up, what kind of monetary, economic or political goals were behind this process and how and for what purpose they are used. To what extend are these FER the result of deliberate and sustainable policies and to what extend did they follow from other - more reactive and short term oriented - policies like exchange rate stabilization? Do high FER provide a cushion against economic emergencies or is there a different connection between FER and crisis? This paper will provide first answers to these questions and set an agenda for further research on the issue.