Japan is suspected of selling off US Treasury bonds to finance record yen intervention, and its foreign exchange reserves have fallen below $1 trillion.

Japan is suspected of funding its record-breaking yen intervention by selling foreign securities, including U.S. Treasury bonds, reigniting concerns about supply pressures on U.S. Treasury bonds.

According to foreign exchange reserve 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 highly consistent with the scale of intervention that month. The Ministry of Finance had previously confirmed that in the month ending August 26, authorities used approximately 15.4 trillion yen (about $98.6 billion) for foreign exchange market intervention, setting a new monthly record, some of which were conducted in conjunction 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 scale of this intervention and the potential impact of its financing method on the US Treasury market have drawn significant market attention. Treasury Secretary Bessant recently announced that the government will double the size of its long-term bond repurchase program within the two months ending November 4th. This move has been interpreted by the market as a measure to suppress rising long-term yields, demonstrating the increasing importance the US places on the stability of the US Treasury market.

Foreign securities holdings plummeted, with clear signs of a sell-off in US Treasuries.

Data from the Ministry of Finance shows that Japan's foreign securities holdings decreased by $87.8 billion at the end of August, close to the scale of intervention spending that 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 US Treasury bonds at the end of August only fell slightly compared to the end of July, meaning that the valuation change had a very limited contribution to the reduction in foreign securities holdings, further supporting the judgment that Japan actively sold US Treasury bonds.

The scale of the intervention was record-breaking, with the US and Japan joining forces.

Data from the Ministry of Finance shows that in the month ending August 26, Japanese authorities used approximately 15.4 trillion yen to intervene in the foreign exchange market, setting a new monthly record, with some operations carried out in conjunction with the United States. This is the largest single-month yen intervention operation to date.

This intervention occurred against the backdrop of significant pressure on the yen's exchange rate, forcing authorities to intervene in the market on a large scale to support the currency. The coordinated nature of the intervention also indicates a deepening level of coordination between the US and Japan on exchange rate issues.

As Japan once again intervenes by selling US Treasury bonds, US officials are increasingly concerned about the stability of the US Treasury market, especially with the midterm elections approaching. Treasury Secretary Bessant recently announced that the government will double the size of its long-term bond repurchase program within two months ending November 4, a move widely seen as aimed at suppressing long-term yields.

This move by Japan demonstrates that even though the US is becoming increasingly sensitive to the stability of the US Treasury market, Tokyo is still willing to sell US Treasury bonds if necessary.

Reserves have fallen below one trillion, but there is still ample room for intervention.

Although Japan's foreign exchange reserves have fallen below the trillion-dollar mark to $995 billion, authorities believe the remaining reserves are sufficient to support potential future interventions. Besides foreign securities, foreign currency deposits, another potential source of intervention funds, also decreased by $6.9 billion at the end of August.

It is worth noting that Japanese Finance Minister Satsuki Katayama stated after the joint US-Japan intervention that future interventions might also utilize the Federal Reserve's Foreign and International Monetary Authority Repo Facility (FIMA Repo Facility). This tool allows Japan to access up to $60 billion in liquidity daily without having to sell US Treasury bonds, thus effectively limiting the impact on US Treasury yields and further expanding potential intervention space.

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