Japan foreign reserves $ 945.601 bln at end-Sept

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TOKYO, Oct 5 (Reuters) Japan's foreign reserves, the world's second largest, rose to a record 5.601 billion at the end of September, the Ministry of Finance said on Friday.

Lower U.S. interest rates inflated the value of U.S. bonds held in the reserves, while the euro's rise against the dollar also boosted the value of euro denominated bonds, a finance ministry official said.

The reserves were up from 2.157 billion at the end of August, rising for the fourth straight month and marking a record high for the third month in a row.

Japan's reserves, second only to those of China, ballooned after yen-selling intervention amounting to a record 20 trillion yen (5 billion) in 2003 and a further 15 trillion yen in the first three months of 2004, as Tokyo tried to keep a rapid rise in the yen from derailing a then-fragile economic recovery and accelerating deflation.

Tokyo has kept out of the market since then, but the reserves have continued to grow slowly partly on interest rate income.

The government does not disclose the currency breakdown of the external reserves. But historical data on Japan's currency intervention, which has mostly taken the form of dollar buying, suggests most of Tokyo's hefty reserves are in dollars.

Japan has been reluctant to diversify its forex reserves and to seek higher returns by making active investments, unlike many other countries which have been recently investing a portion of its reserves in stocks and other high-risk high-return assets.

Vice Finance Minister Hiroki Tsuda said on Thursday that there was no change in that stance.

His comments came after a member of the government's top economic advisory body called for setting up a new fund to actively manage a small part of external reserves.

REUTERS SR SSC1152

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