Another Kind of Sterilization
By: Tetsuya Inoue
Oct. 12 2010
Yen-selling intervention increases the dollar funds in our FX reserves. In the past, its majority was quickly used to buy UST. In the short term, such purchases risk undermining the interventions by reducing the interest rate differentials. Neutralizing the side effect requires the sterilization of dollar funds. In theory, Treasury sales and FX swaps between the US and Japanese authorities could be used. But these are not realistic given the cost to the US. In the long run, meanwhile, the decline in US interest rates could support the US economy and thereby curb downward pressure on the dollar. Thus, the use of Japan's FX reserves to buy UST effectively could become an element of US monetary policy.
