Japan's foreign exchange reserves fell for the third straight month to USD 1.2681 trillion at the end of December, down from USD 1.2708 trillion at end-November, according to data released by the Finance Ministry.
The foreign reserves, however, remained the world's second-largest after China's.
The drop in foreign exchange reserves was mainly due to the declining market value of its US government bond holdings and gold prices, the ministry said. But the value of Japan's euro-denominated assets rose buoyed by the euro's appreciation against the US dollar. The reserves also slid from a year earlier, marking the first annual decline since comparable data became available in 2000.
Japan's foreign exchange reserves consist of securities and deposits denominated in foreign currencies plus the International Monetary Fund (IMF) reserve positions, IMF special drawing rights, and gold. As of December 31, foreign currency reserves stood at USD 1.193 trillion, IMF reserves at USD 13.
70 billion, IMF special drawing rights at USD 19.91 billion, and gold at USD 40.94 billion.
Japan's reserves are closely monitored for evidence of how authorities are managing vast foreign currency holdings, as the actions have significant impact on currency exchange rates and global bond markets, particularly in the US government bond market.
The authorities did not intervene in currency markets to stem the yen's rise after spending JPY 9.09 trillion (USD 102 billion) in the final quarter of 2011, including the biggest ever single-day intervention at around JPY 7.5 trillion (USD 84 billion) on October 31, when the Japanese currency hit a postwar high of JPY 75.32 against dollar.
Japan is the only country with foreign reserves of more than USD 1 trillion besides China, whose holdings hit a record of USD 3.29 trillion at the end of September, according to the latest comparable data.