Yen internationalization and Japan's international reserves

The relationship between major East Asian economies' international reserves and internationalization of their currencies presents a seeming paradox in international finance. While large international reserves may be expected to foster more widespread global use of a currency, strong growth of international reserves has been associated with very low Asian currency internationalization. Using the generalized method of moments (GMM) estimator we show the overall size of the Bank of Japan's international reserves, as well as the ratio of its foreign exchange reserves to international reserves, are negatively related to yen internationalization, while gold reserves and special drawing rights are positively related. •Paradoxically, Japan has large international reserves, yet yen internationalization is low.•Reserve accumulation implies currency undervaluation which deters internationalization.•Japan's foreign exchange reserves are negatively related to yen internationalization.•Gold reserves and special drawing rights are positively related.