Japan's Record Yen Intervention Funded by Selling US Treasuries
Japan intervened in the foreign exchange market on a massive scale last month, spending approximately ¥15.4 trillion, or $98.6 billion, to support the yen. This was the largest monthly intervention on record, and it has left some wondering how Tokyo financed this effort.
New data from Japan's reserve managers suggests that part of this funding came from selling U.S. Treasury securities. According to Bloomberg, foreign securities held in Japan's reserves fell by $87.8 billion in August, the biggest monthly decline on record. While the Finance Ministry has acknowledged that intervention contributed to this decline, it has not confirmed which securities were sold.
Market estimates suggest that approximately 70% of Japan's foreign reserve portfolio is invested in Treasury securities, making U.S. Treasuries a likely source of cash for Tokyo's intervention. Reserve managers generally prefer highly liquid securities that can be converted into cash quickly without creating large market moves, and short-term Treasuries fit this description.
The important question now is whether Japan focused on selling short-dated Treasuries, with maturities of five years or less, rather than longer-duration bonds. This would reduce the potential impact on U.S. long-term borrowing costs and minimize upward pressure on yields at a time when Washington is trying to stabilize the long end of the curve.