TOKYO, Jan. 8 (Xinhua) -- Japan's foreign reserves declined to 1,049.40 billion U.S. dollars at the end of December, down 24.32 billion U.S. dollars from a month earlier, the Ministry of Finance said on Friday.

    According to the Finance Ministry, the reserves fell for the first time in six months on losses in the value of its holdings of U.S. treasury bonds and euro-denominated assets.

    December's decline marks the steepest drop since April 2000, having reached record highs in the previous four months.

    Market players are keeping a close watch on the new Finance Minister Naoto Kan's stance on foreign reserves management, as some lawmakers from the Democratic Party of Japan have called for more active management of dollar assets in Japan's reserves, such as taking more credit risks.

    Japan's foreign exchange reserves are comprised of mainly securities and deposits denominated in foreign currencies, gold, and reserve positions and special drawing rights at the International Monetary Fund.

    A drop in reserves of Japan's foreign currency inhibits the government's ability to manipulate exchange rates in order to provide a more favorable economic environment.

    Additionally, such a drop in Japan's foreign reserves weakens its position to defend itself from speculative attacks on the domestic currency.

    Foreign exchange reserves are important indicators of a country's ability to repay foreign debt, currency defense and are also used to determine credit ratings of countries.

Special Report:  Global Financial Crisis