Japan Likely Sold Treasuries to Fund Record Yen Intervention

Treasury sales linked to intervention may not go down well in Washington, D.C., where officials have become increasingly focused on the stability of the markets for U.S. government bonds. Earlier this year, U.S. Treasury Secretary Scott Bessent warned his Japanese counterparts that volatility in Japan's bond market could spill over into Treasuries, underscoring his sensitivity to large-scale selling by foreign holders.

A senior Japanese Finance Ministry official speaking on the sidelines of the Group of Seven meeting of finance ministers in Paris last month said that Japanese authorities were mindful of the risks from selling their holdings of U.S. government bonds, as that could lead to an increase in American yields—in turn triggering a counterproductive decline in the yen.

"Japan went ahead with the intervention. So it's natural to interpret that to mean Washington is willing to tolerate some risk of higher U.S. yields," said Koichi Fujishiro, an economist at Dai-ichi Life Research Institute.

Speaking in parliament on Friday, Finance Minister Satsuki Katayama said that "bold actions"—which normally refers to foreign exchange (FX) intervention—are permitted under the U.S.–Japan joint FX statement, in remarks that appeared to justify Japan's actions over the past month. She added that the government stands ready to respond appropriately to currency moves at any time if needed, warning speculators that the authorities could take further action.

The report showed foreign currency reserves fell to $1.09 trillion at the end of May, an indication of the large stack of resources Japan can draw on if it needs to intervene again. Foreign currency deposits, another potential source of funds for intervention, were largely unchanged at $162 billion. The price of 10-year Treasuries fell from the end of April, suggesting that a small portion of the fall in the foreign securities will likely be linked to a decline in the valuation of the Treasury holdings.

The data do not provide a detailed breakdown of securities holdings or bond maturities. Still, market participants estimate that roughly 70 percent of Japan's foreign reserves is invested in U.S. Treasuries. The Federal Reserve's custody holdings of Treasuries also showed that Japan likely offloaded U.S. securities to fund its recent yen purchases.

"If Japan sold very short-dated Treasuries, that probably wouldn't matter much to the U.S.," Fujishiro said. "The situation would be very different if Japan dumped a large amount of 10-year Treasuries and disrupted supply and demand in that market."

So far, Washington has shown little public opposition to Tokyo's efforts to support the yen this year. During a visit to Tokyo last month, Bessent described excessive FX volatility as undesirable, signaling the U.S.'s tacit approval of Japan's measures aimed at smoothing disorderly market moves. At the same time, Bessent also expressed confidence in Bank of Japan (BOJ) Governor Kazuo Ueda, implying that the United States probably wants higher Japanese interest rates to help lift the yen going forward.

BOJ officials are set to discuss a possible interest rate increase at their June 15 and 16 policy meeting, and they see the possibility of a further rate hike later this year, according to people familiar with the matter.

Still, higher borrowing costs alone may not be enough to reverse pressure on the yen, leaving open the possibility of further government action should the currency come under renewed strain. Even with expectations of a June rate hike at around 92 percent, according to an index of overnight swaps, the currency continues to hover around levels that have seen intervention previously. The yen was at 159.93 against the dollar mid-Friday morning in Tokyo.

Two years ago, Japan spent around $100 billion supporting the yen, with an initial campaign from late April to early May followed by a second salvo of intervention in early July before the BOJ raised rates later that month.

The U.S. Treasury Department is expected to publish its semi-annual foreign exchange report later this month. The report may provide further insight into Washington's assessment of Tokyo's actions. In its January FX report, the U.S. said Japan remained one of 10 economies on its monitoring list of major trading partners whose currency practices and macroeconomic policies merit close attention.

"From the US perspective, if yen weakness continues and Japan is forced to intervene repeatedly, that could eventually require larger sales of US Treasuries," said Fujishiro. "For that reason, I think Washington also views excessive yen depreciation as undesirable."

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