Japan’s Central Bank responded to rumors that it was gradually diversifying its foreign exchange reserves with an emphatic denial. All eyes have been on Japan recently, as rumors of diversification have surfaced and been squashed- only to resurface. Japan is home to the world’s largest foreign exchange reserves, with over $800 Billion in dollars alone. It has bought over $300 Billion Dollars in the last two years in an effort to stabilize the Yen, which continued to appreciate. Now, Japan’s Central Bank is faced with a dilemma: continue buying Dollars in a futile effort to stabilize the Yen, or Sell Dollars to try to recoup losses on its forex reserves. Japan has pledged not to diversify, so as not to roil currency markets, but many experts feel Japan may soon run out of options. Furthermore, Japan is treading dangerously, as other Asian nations are watching it for cues on how to handle their respective reserves. A rumor last month exemplified just how precarious this situation is. Reuters reports"

Prime Minister Junichiro Koizumi’s comments last month that diversification in currency reserves was necessary sparked a wave of dollar selling as the comments were interpreted as implying a reduction in dollar holdings.

Read More: Japan Denies Changing Currency Mix in FX Reserves