Japan may have utilized its holdings of foreign securities, which include U.S. Treasuries, to fund the record-scale foreign exchange market interventions conducted 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 foreign securities holdings had 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 of Finance confirmed last week that funds used for such interventions reached a record 11.73 trillion yen ($73.4 billion) for the period up to May 27.
An official from the ministry, speaking at a report briefing, acknowledged that the currency market interventions were a factor in the significant drop in foreign exchange reserves and stated this was the largest decrease on record.
Raising funds for intervention by selling U.S. Treasuries may not be welcomed in Washington. U.S. officials are increasingly concerned about the stability of the U.S. Treasury market. Earlier this year, U.S. Treasury Secretary Scott Bessent warned Japanese officials that volatility in Japan's bond market could spill over into the U.S. Treasury market, indicating a high level of vigilance regarding large-scale sales of U.S. debt by foreign investors.
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 U.S. Treasury holdings, as it could push up U.S. bond yields, potentially leading to further yen depreciation and thereby undermining the effectiveness of the intervention.
Koichi Fujishiro, an economist at Dai-ichi Life Research Institute, said, "Japan ultimately proceeded with the intervention. Therefore, a natural interpretation is that Washington is willing to tolerate a certain degree of risk from rising U.S. Treasury yields."
Japan's Finance Minister, Shunichi Suzuki, told parliament on Friday that, according to the U.S.-Japan joint foreign exchange statement, Japan is permitted to take 'decisive action'—a term typically referring to currency market intervention. His remarks appeared to defend Japan's actions over the past month. He also stated that the government stands ready to respond appropriately to exchange rate movements if necessary and warned speculators that authorities could take further action.
The report showed Japan's foreign exchange reserves fell to $1.09 trillion at the end of May, indicating that if Japan needs to intervene in the currency market again, it still has substantial resources available. Another potential source of intervention funds—foreign currency deposits—remained largely unchanged at $162 billion. The decline in foreign securities assets may be partly attributed to a drop in the price of U.S. 10-year Treasury notes since late April, which reduced the valuation of Japan's holdings.
However, the data released on Friday did not provide details 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 U.S. Treasuries. Data from the U.S. Federal Reserve's custody of U.S. Treasury holdings for foreign official institutions also indicates that Japan may have sold some U.S. securities to raise funds for its recent yen-buying operations.
"If Japan sold ultra-short-term U.S. Treasuries, the impact on the U.S. market might be limited," Fujishiro said. "But if Japan sold a large amount of 10-year Treasuries, it could disrupt the supply-demand balance in that market and affect the U.S. bond market."
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