The USD/JPY pair continued its upward trajectory in early Asian trading on Wednesday, briefly touching a new near 40-year high of 162.80, a gain of approximately 0.15%.
The risk that Japan's Ministry of Finance may be forced into sustained intervention to defend the yen is not merely a currency issue.
The CEO of global financial consultancy deVere Group has warned that if Japanese authorities are compelled to sell large quantities of U.S. Treasuries to fund such interventions, the world's most critical bond market could face fresh turbulence.
The Core Issue: Risk Lies Not with Yen, but with U.S. Treasuries
Nigel Green, CEO of deVere Group, notes that as the yen hits its lowest level against the dollar since 1986, the market's entire focus is on whether the Ministry of Finance will intervene in the foreign exchange market. However, he believes this misses the point.
"Everyone is focused on whether Tokyo will intervene after the yen's 40-year low," Green stated, "But the more important question is – what will Japan use to pay for the intervention?"
He further warned that if authorities are forced to intensify their support for the yen over an extended period, global investors might suddenly find themselves confronting a completely different risk: one of the largest foreign holders of U.S. Treasuries becoming a more significant seller.
Funding the Intervention: Selling Treasuries is an Unwelcome but Practical Choice
Japanese officials have repeatedly stated they are prepared to take decisive action against excessive currency volatility. During previous periods of market stress, Japan has spent over 11 trillion yen on intervention operations. However, funding for earlier rounds primarily came from the Ministry's dollar deposits and short-term liquidity instruments, not from large-scale sales of U.S. Treasuries.
But if the pressure for yen depreciation persists—with USD/JPY now above 162—the Ministry of Finance's available dollar liquidity will gradually deplete. At that point, selling its holdings of U.S. Treasuries would become the most direct source of dollar funding.
Japan holds over $1 trillion in U.S. Treasuries, making it one of America's largest foreign creditors. Green points out that to support the yen, Japanese authorities must sell foreign exchange reserves, a significant portion of which are invested in dollar-denominated assets, including U.S. Treasuries.
If this scenario materializes, its impact would extend far beyond the foreign exchange market.
The Fundamental Contradiction: Intervention Cannot Reverse Structural Forces
Green believes the fundamental challenge for Japanese policymakers is that intervention alone is unlikely to reverse the structural forces weakening the yen—primarily the persistent interest rate and yield differential favoring dollar assets over yen assets.
"The reality facing policymakers is harsh: intervention can smooth market volatility, but history tells us it rarely alters the underlying economic fundamentals," Green emphasized.
"As long as investors can borrow yen at low cost and earn significantly higher returns elsewhere, structural pressure on the yen will persist."
This reality means Japanese authorities may be forced into multiple interventions, each incrementally increasing pressure on foreign exchange reserves. As the dollar cash portion of those reserves is depleted, pressure to sell U.S. Treasuries will rise.
Potential Shockwaves for Global Financial Markets
If Japan is forced to continuously sell U.S. Treasuries, the ripple effects could spread across global financial markets:
The U.S. Treasury market would face pressure: As one of the largest foreign holders, sustained selling by Japan would push Treasury yields higher, increasing borrowing costs for the U.S. government.
Global risk assets would face revaluation: Higher U.S. Treasury yields imply a rise in the global risk-free rate anchor, putting valuation pressure on assets like equities and emerging market securities.
Yen funding costs would rise: Tightening yen liquidity resulting from intervention could push up yen funding rates, affecting global carry trade strategies.
Green warns that the market is asking "Will Japan intervene?", but investors should be asking: "If Japan is forced to intervene repeatedly, what assets will it need to sell to defend the yen? If the answer increasingly points to U.S. Treasuries, then what appears today as a Japanese currency crisis could evolve into a crisis for the global bond market tomorrow."
Key Factors to Monitor
For global investors, the movement of USD/JPY is no longer just a foreign exchange trade; it is now closely linked to the liquidity conditions of the U.S. Treasury market. The following indicators warrant close attention:
The scale and funding source of the Ministry of Finance's interventions: The risk of Treasury sales will rise if the frequency and size of interventions accelerate.
The movement of the U.S. Treasury yield curve: A significant rise in long-end yields due to Japanese selling pressure would have spillover effects on global asset pricing.
The pace of carry trade unwinding: Any temporary yen strength triggered by intervention could prompt large-scale unwinding of carry trades, amplifying global market volatility.
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