Japan's Record Sale of U.S. Bonds Intervenes in Forex Market as Reserves Fall Below $1 Trillion

Original Title: "Japan Suspected of Selling U.S. Bonds to Finance Record Yen Intervention, Forex Reserves Fall Below $1 Trillion" Original Author: Zhao Ying, The Wall Street Journal

Japan is suspected of selling U.S. Treasury bonds and other foreign securities to fund its record yen intervention, raising market concerns about supply pressures on U.S. bonds.

According to data released by Japan's Ministry of Finance on Monday, Japan's foreign securities holdings decreased by $87.8 billion at the end of August compared to the previous month, a decline that closely matches the scale of intervention during the month. The Ministry had previously confirmed that, as of August 26, authorities had used approximately 15.4 trillion yen (about $9.86 billion) for forex market intervention, setting a monthly historical record, with some operations conducted in coordination with the U.S. As a result, Japan's total foreign exchange reserves fell by $94.6 billion to $995 billion, dropping below the $1 trillion mark.

The scale of this intervention and the financing method's potential impact on the U.S. bond market have drawn significant market attention. Finance Minister Shunichi Suzuki recently announced that the government would double the scale of long-term bond repurchases over the two months ending November 4, a move interpreted by the market as an effort to suppress rising long-term yields, indicating that the U.S. is increasingly concerned about the stability of the U.S. bond market.

Sharp Decline in Foreign Securities Holdings, Clear Signs of U.S. Bond Sales

Data from the Ministry of Finance shows that Japan's foreign securities holdings decreased by $87.8 billion at the end of August, closely aligning with the scale of intervention spending for the month. Although the data did not disclose the specific composition and maturity distribution of the securities holdings, market participants generally estimate that about 70% of Japan's foreign exchange reserves are invested in U.S. Treasury bonds.

From a market price perspective, the price of 10-year U.S. Treasury bonds at the end of August only slightly declined compared to the end of July, indicating that valuation changes contributed very little to the reduction in foreign securities holdings, further supporting the judgment that Japan actively sold U.S. bonds.

Record Intervention Scale, Joint Action by Japan and the U.S.

Data from the Ministry of Finance shows that, within the month ending August 26, Japanese authorities used approximately 15.4 trillion yen for forex market intervention, setting a monthly historical record, with some operations conducted in coordination with the U.S. This is the largest single-month yen intervention action to date.

The backdrop for this intervention is the significant pressure on the yen exchange rate, forcing authorities to enter the market on a large scale to support the domestic currency. The joint intervention also indicates a deepening coordination between Japan and the U.S. on exchange rate issues.

As Japan once again resorts to selling U.S. bonds to finance its intervention, U.S. officials' attention to the stability of the U.S. bond market continues to rise, especially with the midterm elections approaching. Finance Minister Shunichi Suzuki recently announced that the government would double the scale of long-term bond repurchases over the two months ending November 4, which the market generally believes aims to suppress long-term yields.

Japan's actions indicate that even as the U.S. becomes increasingly sensitive to the stability of the U.S. bond market, Tokyo is still willing to resort to selling U.S. bonds when necessary.

Reserves Fall Below $1 Trillion, but Intervention Capacity Remains Ample

Although Japan's foreign exchange reserves have fallen below the $1 trillion mark, down to $995 billion, authorities believe that the remaining reserve scale is still sufficient to support potential future intervention actions. In addition to foreign securities, foreign currency deposits serve as another potential source of intervention funds, which also decreased by $6.9 billion at the end of August.

Notably, Japan's Finance Minister Satsuki Katayama stated after the joint intervention with the U.S. that future intervention actions may also utilize the Federal Reserve's Foreign and International Monetary Authorities Repo Facility (FIMA Repo Facility). This tool allows Japan to access up to $60 billion in liquidity daily without selling U.S. bonds, effectively limiting the impact on U.S. bond yields and further expanding potential intervention capacity.

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