-->Mechanics of the MoF's Foreign Exchange Fund
· The MoF raises Yen to sell in its intervention by issuing short-term Foreign Exchange Financing Bills (FEFBs). The FEFBs sold to raise intervention funds are liabilities of the Foreign Exchange Fund (FEF). The FEF has a cumulative borrowing ceiling of Y79 trillion for FY03. This ceiling, which is set every year in the budget, was raised by Y10 trillion in both FY02 and in FY03.
· The Nikkei flagged in early Oct that the MoF was considering raising the issuance ceiling of the FEF by Y10-20 trillion to reduce the risk of it running out of ammunition for intervention.
A supplementary budget is required to increase the issuance ceiling, but the Nov 9 general election means that a normal supplementary budget is now unlikely to be passed until at least Jan-Feb 2004.
· To quell speculation that the MoF could run out of FX funds before then, it has been mooted that the MoF could sell some of its foreign-currency bonds (the MoF holds about U$467bn in foreign currency denominated securities) directly to the BoJ in return for Yen.
This would allow the MoF to raise more Yen funds without having to issue more FEFBs or to raise the issuance ceiling.
· There are various restrictions on the BoJ’s purchases of bonds from the government but these apparently do not apply to foreign bonds. To reduce the FX risk to the BoJ’s balance sheet repurchase agreements could be used.

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Bottom Line: If the Nihon Keizan is correct, and the MOF formally announces the sale of some of its U.S. Treasuries and other foreign bonds to the BoJ at the BoJ's next policy meeting on Nov 20-21,