Look, usually you think of a bank "reserve" as a "reserve" held against deposit liabilities. It is money "not loaned out". Viewed another way, it is cash held as "reserve" against loans that might head south. One way or another ratios have to be maintained.
But, in essence, you have yen deposit liabilities (yen owed to customers) against dollar assets (dollars owed to banks in the form of loans). Japanese regulatory practice is to keep a certain % of yen in reserve against dollar assets. When the dollar goes up, the required yen increases (causing a constriction in lending). When the dollar goes down, the required yen decreases (theoretically adding liquidity to the banking system).
Just think of the dollar as an asset similar to stocks or land. If the price of any asset goes up, its value as a bank asset against liabilities increases. If the price heads south, the bank is "weakened" and needs to shore up its position by decreasing lending till the good asset (such as "cash") makes up for the weakness in the bad asset.
-- Gregory P. Nowell Associate Professor Department of Political Science, Milne 100 State University of New York 135 Western Ave. Albany, New York 12222
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