Japan may have utilized its holdings of foreign securities, which include US Treasury bonds, to finance its record-breaking currency market interventions over the past month, a move that could draw attention from the United States.
According to reserve data released by Japan's Ministry of Finance on Friday, the nation's holdings of foreign securities decreased by $75.6 billion by the end of May compared to April. This decline is roughly equivalent to the amount Japan recently spent on market interventions to support the yen. The Ministry confirmed last week that funds used for currency market intervention through May 28th reached a record 11.73 trillion yen ($7.34 billion).
Raising funds for currency intervention through the sale of US Treasuries is unlikely to be welcomed by Washington. US officials are increasingly focused on the stability of the US Treasury market. Earlier this year, US Treasury Secretary Scott Bessent warned Japanese officials that volatility in Japan's bond market could spill over into the US Treasury market, indicating his high level of vigilance regarding large-scale foreign selling of US debt.
During a G7 finance ministers' meeting in Paris last month, a senior Japanese finance ministry official stated that authorities are aware of the risks associated with selling US Treasury holdings, as it could push up US yields, potentially leading to further yen depreciation and thereby undermining the effectiveness of the intervention.
"Japan ultimately did intervene in the currency market," said Dai-ichi Life Research Institute economist Koichi Fujishiro. "Therefore, a natural interpretation is that Washington is willing to tolerate a certain degree of risk stemming from a rise in US Treasury yields."
On Friday, Japanese Finance Minister Shunichi Suzuki told parliament that, under the US-Japan joint foreign exchange statement, Japan is permitted to take 'decisive action'—a term typically referring to currency intervention. His remarks appeared to defend Japan's actions over the past month. He also stated that the government is prepared to respond appropriately to exchange rate movements if necessary and warned speculators that authorities could take further action.
The report showing Japan's foreign reserves fell to $1.09 trillion at the end of May indicates that Japan still has a substantial pool of resources to draw upon if it needs to intervene in the currency market again. Another potential source of intervention funds—foreign currency deposits—remained largely unchanged at $162 billion. The decline in foreign securities assets could be partly due to falling prices of US 10-year Treasury notes since the end of April, which reduced the valuation of Japan's US debt holdings.
However, the data released on Friday did not provide detailed information on the specific securities Japan holds or their maturity structure. Market estimates suggest that approximately 70% of Japan's foreign exchange reserves are invested in US Treasury bonds. Data on US Treasury holdings held in custody by the Federal Reserve for foreign official institutions also indicates that Japan may have sold some US securities to raise funds for its recent yen-buying operations.
"If Japan is selling ultra-short-term US Treasury bills, the impact on the US market might be limited," Fujishiro said. "But if Japan sells a large volume of 10-year Treasury notes, it could disrupt the supply-demand balance in that market and affect the US bond market."
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