With the US trade deficit recently widening to an 18-month high, the issue of global imbalances is back at the forefront of the international economic agenda. Yet whereas the impact of exchange rates on trade flows has been much debated, hardly ever discussed are the costs countries bear, particularly in Asia, for the excess foreign exchange reserves they carry as a counterpart to their persistent trade surpluses.

The world's leading holders of foreign exchange reserves are China, with $2.4 trillion worth, and Japan, with $1 trillion worth. About 70% of such funds are held in US dollars, mostly in the form of low-yielding US Treasury securities. Many commentators, top Obama Administration economics adviser Larry Summers most prominent among them, have suggested that such funds are invested over-conservatively, resulting in opportunity costs on the order of 6%.