TOKYO - Japan's foreign reserves fell by a record to US$1.24 trillion (S$1.77 trillion) at the end of September as a result of the government's dollar-selling intervention during the month to arrest a sharp decline in the yen, Ministry of Finance (MOF) data showed on Friday.

The amount compared with US$1.409 trillion seen a year ago and was the second straight month of year-on-year decrease in Japan's foreign reserves, which are the world's second largest in size after China's.

The decline in the reserves was reported after separate MOF data last week that showed Japan spent up to a record 2.8 trillion yen (S$27.6 billion) intervening in the market last month.

Japan's foreign reserves are comprised of cash deposits parked at overseas central banks and the Bank for International Settlements, securities including US Treasuries, gold, and  International Monetary Fund reserve position and Special Drawing Rights.

The drops in deposits and securities meant that these two types of assets were likely used to finance the latest intervention.

The MOF does not reveal the make-up of currencies in the reserves, the bulk of which is believed to be in United States dollars from the past practice of dollar-buying, yen-selling intervention to prevent a strong yen from damaging exporters.

Such intervention has been rare in Japan, which has long counted on exports of cars and electronics as key drivers of economic growth.

Now, policymakers are concerned more about the impact of sharp and one-sided yen weakening on a nascent economic recovery from the Covid-19 pandemic as it drives up living costs while making it harder for business planning.

The previous record amount for a single-day intervention was 2.6 trillion yen spent in April 1998 during the 1997-1998 Asian financial crisis.

Investors are closely watching daily intervention data due in November for the July to September period to see whether the authorities conducted "stealth intervention", or intervening without official announcement.

Japan had not conducted dollar-selling, yen-buying intervention since 1998, until the authorities made a foray into the market on Sept 22 when the Japanese currency dropped sharply to a 24-year low near 146 yen to the dollar. REUTERS