Japan's Record Yen Intervention Costs Reveal Largest Foreign Exchange Reserve Decline

Japan's foreign exchange reserves plummeted to $1.208 trillion at the end of August, down $79.6 billion from July and marking a single-month decline of 6.18%. This represents the largest drop on record.

The main driver behind this decrease was a substantial decline in foreign securities holdings, which fell by $87.8 billion month-on-month at the end of August. Market participants estimate that most of Japan's overseas securities consist of U.S. Treasuries, which were accumulated from yen-selling interventions two decades ago.

Notably, the FX reserve data does not provide a breakdown of securities holdings or maturity schedules. However, with 10-year Treasury prices only slightly lower at the end of August compared to July, valuation changes account for only a small fraction of the decline in overseas securities holdings, further evidence that the reduction stemmed primarily from actual sales rather than market price declines.

The intervention campaign briefly pushed the yen from around ¥164 per dollar, a 40-year low, to ¥155.2 on August 3. The yen subsequently weakened back toward ¥160 before recovering to the ¥155-156 range in early September.