Japan suspected of selling US Treasuries for record-breaking yen intervention financing, foreign exchange reserves fall below $1 trillion

Japan has reportedly raised funds for its record-breaking yen intervention by selling U.S. Treasury bonds and other foreign securities—sparking renewed concerns in the market over the supply pressure on U.S. Treasuries.

According to foreign exchange reserve data released by Japan’s Ministry of Finance on Monday, Japan’s foreign securities holdings at the end of August decreased by $87.8 billion compared to the previous month, a drop closely matching the scale of intervention during that period. The Ministry of Finance previously confirmed that, over the month through August 26, the authorities deployed approximately 15.4 trillion yen (about $98.6 billion) for foreign exchange market intervention—a monthly record high— with some operations conducted jointly with the United States. As a result, Japan's total foreign exchange reserves fell by $94.6 billion to $995 billion, dropping below the $1 trillion mark.

The sheer scale of this intervention and the funding method’s potential impact on the U.S. Treasury market have drawn intense attention. Treasury Secretary Besant recently announced that, over the two months through November 4, the government would double its long-term bond buyback program—a move widely interpreted by markets as an effort to curb the rise of long-term yields, underscoring the increasing importance the U.S. attaches to the stability of the Treasury market.

Foreign securities holdings plunge, clear signs of U.S. Treasury selling

Ministry of Finance data show Japan’s foreign securities holdings fell by $87.8 billion at the end of August, nearly matching the scale of its intervention spending that month. Although the data do not disclose the specific composition or maturity distribution of its securities holdings, market participants widely estimate around 70% of Japan's foreign reserves are invested in U.S. Treasuries.

From a market price perspective, 10-year U.S. Treasuries saw only a modest decline from July to August, indicating that valuation changes contributed very little to the reduction in foreign securities holdings—further supporting the conclusion that Japan actively sold U.S. Treasuries.

Record-breaking intervention, Japan and U.S. join forces

Data from the Ministry of Finance indicate that, in the month to August 26, Japanese authorities deployed roughly 15.4 trillion yen in FX market intervention—a new record for monthly intervention, with some actions conducted jointly with the United States. This stands as the largest single-month yen intervention to date.

The context for this intervention was mounting pressure on the yen, compelling authorities to enter markets on an unprecedented scale to support the currency. The joint approach also suggests closer coordination between Japan and the U.S. on exchange rate matters.

As Japan once again tapped U.S. Treasury sales as a source of intervention funding, U.S. officials have become increasingly focused on the stability of the Treasury market, particularly with midterm elections approaching. Treasury Secretary Besant recently announced the government would double its long-term bond buyback scale in the two months to November 4—a step widely seen as aimed at suppressing long-term yields.

Japan’s latest moves indicate that, even as the U.S. grows more sensitive to the stability of its Treasury market, Tokyo remains prepared to sell U.S. Treasuries if necessary.

Reserves slip 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 the remaining reserves are sufficient to support further potential intervention. In addition to foreign securities, FX deposits—another possible source for intervention—also fell by $6.9 billion at the end of August.

It is noteworthy that Finance Minister Satsuki Katayama said after the joint Japan-U.S. intervention that future interventions might make use of the Federal Reserve’s Foreign and International Monetary Authorities Repo Facility (FIMA Repo Facility). This tool allows Japan to obtain up to $60 billion in liquidity per day without having to sell U.S. Treasuries, thereby effectively limiting the impact on Treasury yields and further expanding its potential capacity for intervention.