Japan's Ministry of Finance bought a lot of dollars in 2003 and early 2004. Those dollars won't buy as many euros now as they did then, but, the Ministry of Finance cares about their value in yen, not their value in euros. And if it wanted to, the MoF could sell its dollars now for more yen than it paid to buy them. The dollar has appreciated v. the yen and the MoF is getting a higher coupon on its Treasuries than it pays on its yen bonds.
The FT thinks Japan should start selling. It may not have as good an opportunity in the future -- if nothing else, it could start selling the coupon payments to keep its reserves from rising ...
The Bank of Japan should not raise interest rates: given weak economic data and the lack of inflationary pressure that would be folly. But it could start to reduce the $875bn in foreign exchange reserves it built up in earlier years to stop the yen appreciating. Those reserves are dead money that the BoJ could better employ elsewhere: other central banks, like that of China, would love such an opportunity. But most of all, selling down reserves would demonstrate to the world that Japan's currency interventions work both ways, and that it is interested in the stability of the yen rather than in keeping it permanently undervalued."
Interesting idea. Not going to happen though. At least not for now. Japan's Mininstry of Finance has shown no signs that it is concerned about yen weakness.
I suspect, though, that the market expects that the Japanese -- whether the BoJ or the MoF -- would step in and intervene should the yen suddenly start to strengthen. That makes carry trades more attractive. The ability to sell dollars to the Japanese government in a pinch helps cap the scale of any potential losses on the carry trade.