Some government officials, including Financial Services Minister Yuji Yamamoto, are calling for more effective management of Japan’s foreign-exchange reserves, the world’s second largest at about $910 billion. During a recent visit to Singapore, Mr. Yamamoto proposed that Japan consider investing foreign-currency reserves in high-yield bonds, stocks and real estate of countries other than the United States. He said if Japan wants to sustain economic growth, realizing high profits in the financial field will become important.

His proposal is not without merit. But hasty conclusions should be avoided since losses from investment in high-risk, high-return assets could damage the nation’s already debt-ridden financial state.

Japan’s foreign-exchange reserves were surpassed by China in the beginning of 2006. At the end of June, China’s foreign-exchanges reserves stood at $1.33 trillion, an increase of 41.6 percent over the level a year before. Both China and Singapore are investing foreign-currency reserves in high-risk, high-return assets such as stocks and investment funds. China announced that it will invest $3 billion in U.S. investment funds.

The Finance Ministry does not make public where it invests Japan’s foreign-exchange reserves, but it is believed that the bulk of it goes into U.S. treasury bonds. Given that the ministry places a priority on safe investments, it is unlikely that it will readily accept Mr. Yamamoto’s proposal.

But the Finance Ministry’s approach is not without risk. A steep fall in the prices of U.S. treasury bonds could result in heavy losses. It may be wise to disperse risks by investing some foreign-exchange reserves in other safe assets, such as euro-denominated bonds. But apart from the question of how to invest, too large an amount of foreign-exchange reserves is a sign of overall economic imbalance. The government should rethink its economic and social policies.

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