Foreign Exchange Reserves as a Buffer in Japanese Countercyclical Policy

Abstract

In recent times, countercyclical policy through various monetary and fiscal measures has been developed, especially in the United States. However, in Japan, the amount of foreign exchange reserves is the strategic factor which determines the limit of proper countercyclical policy. The Economic Planning Board of the JapaTlese Government describes the requirements for balanced economic development, as follows : "An optimum expansion is a long-range proposition. The actual econornic trends will fluctuate above or below the optimum expansion rate according to the prevailing circumstances. Japanese economic conditions are subj ect to change largely with world market fluctuations. It is desirable that the shocks of change be absorbed and changes in economic conditions in Japan be kept in minimum degree with a view to a stable, pennanent expansion on a basis of an optimum expansion rate. For this purpose the national treasury and the money market had better be equipped with a device to adjust the rate of economic expansion. In a country like Japan where economic situations are liable to effect the nation's international balance of revenue and payment, there should be a reserve holding of foreign exchange as a prerequisite for the policy of insuring business prosperity."I This seems to suggest a foreign exchange reserves buffer policy. Yonosuke Goto, head of the Economic Planning Board Reseach Department at that time, gave the following personal explanation of this policy,2 In case exports are expanding as the result of a boom in world markets, foreign exchange reseives should be accumulated ; and in case exports are diminishing as a result of depression in world markets, foreign exchange reserves should be used to maintain imports. To accumulate foreign exchange reserves during prosperity, it is necessary to restrict domestic demand and imports, in spite of the increase in exports. In the other hand, in the case of depression, domestic demand should be expanded through proper fiscal and monetary policy to counterbalance the decrease in