The People's Bank of China, which holds $1 trillion in currency reserves, has been buying yen, Deputy Governor Wu Xiaoling said.

Asked whether the central bank had been buying Japan's currency, Wu said: "We have." "We have been holding Japanese yen in our foreign exchange reserves for many years," she said on the sidelines of a conference organized by Bank Indonesia in Bali. She declined to say if the pace of buying had increased.

Central banks in Russia, Switzerland and New Zealand are increasing holdings of yen, anticipating the currency will rebound from a 20-year low on rising interest rates and the longest economic expansion since World War II.

China is diversifying its reserves, about two-thirds of which are held in dollars. The nation's investors own $339 billion of Treasuries, the second-largest overseas holding after Japan.

"They seem to be testing the water and moving toward more diversification away from the dollar and into the yen and probably the South Korean won too," said Nizam Idris, a currency strategist at UBS AG in Singapore. "Though they're not selling dollars to buy yen, just buying less of the dollar."

The yen rose to 117.82 per dollar at 11:03 a.m. in Tokyo compared with 118.02 late in New York yesterday. Japan's currency was also at 151.16 against the euro from 151.39. In October, it was at the lowest since 1985 against currencies of major trading partners, according to a monthly Bank of Japan index.

The yen rallied in the final two days of last week after Central bank Governor Zhou Xiaochuan said China intends to diversify its reserves, without dumping dollars.

Reserve Requirements

The central bank increased interest rates twice this year and raised the amount of deposits lenders must hold as reserves three times to help drain excess cash in the financial system to curb investment and lending.

"Whether we will adjust the requirement is not so based or not pointed to the general economy but to the liquidity in the market," said Wu. "Based on the double surplus in both the current and the capital account. It's up to you to decide whether China has excess liquidity or not."

China's reserves continue to swell as it buys dollars to prevents the yuan from appreciating too rapidly. Foreign- currency reserves have increased from $794 billion a year ago. China abandoned the yuan's peg against the U.S. currency in July last year and allows a gain or loss of 0.3 percent a day against the dollar.

China's Growth

Gross domestic product increased 10.4 percent at an annual rate in the third quarter, the third straight period of expansion faster than 10 percent.

U.S. trade deficit with China reached a record $23 billion in September. The trade deficit is on target to exceed last year's record $201.6 billion by more than 6 percent, according to the U.S. government.

Central banks worldwide are turning to higher-yielding assets in their reserves, such as buying Fannie Mae bonds instead of Treasury bills, and diversification hasn't reduced the share of dollars among reserves worldwide. Dollars accounted for 66 percent of reserves at the end of March, little changed from 70 percent in 2001, the BIS quarterly report showed.