The yen broke through the 155 mark! Previous reports indicated that Japan sold off US Treasury bonds to finance its currency recovery.

The yen's recent rise has accelerated significantly. Amid rising expectations of a Bank of Japan interest rate hike and renewed market vigilance regarding potential government intervention in the foreign exchange market, the USD/JPY pair quickly broke through the key level of 155, with the yen reaching its highest level since February. Market attention has also intensified regarding the potential impact of Japan's foreign exchange policy and the US Treasury market.

On September 7, the US dollar rose as much as 1.4% against the Japanese yen to 154.06 yen, breaking through the 155 mark; the yen rose 2.4% last week, a significant reversal from its previous weakness of breaking through 160 yen to the US dollar.

As previously reported by Wall Street News , Japan is suspected of funding its record-breaking yen intervention by selling US Treasury bonds and other foreign securities. Japan's sharp decline in foreign exchange reserves in August, falling below $1 trillion, further reinforces market speculation that the sale of US Treasury bonds was a means of financing the intervention.

If Japan continues to raise funds for foreign exchange market intervention by selling US Treasury bonds, the supply pressure in the US Treasury bond market may attract further attention; while whether the yen can continue its upward trend depends on multiple factors such as the Bank of Japan's interest rate hike expectations, the government's willingness to intervene, and the flow of funds in the market.

Japan appears to be selling off US Treasury bonds in preparation for record-breaking intervention in financing.

According to a previous Bloomberg report, Japan may fund its record yen intervention by selling foreign securities such as U.S. Treasury bonds.

Data from Japan's Ministry of Finance shows that in the month ending August 26, Japanese authorities intervened in the foreign exchange market with approximately 15.4 trillion yen (about US$98.6 billion), setting a new monthly record. Some of these operations were carried out in conjunction with the United States. Meanwhile, Japan's foreign securities holdings at the end of August decreased by US$87.8 billion compared to the end of July, a decline closely matching the scale of the intervention that month.

During the same period, Japan's total foreign exchange reserves fell by $94.6 billion to $995 billion, dropping below $1 trillion. Although the Ministry of Finance did not disclose the specific composition of foreign securities, the market generally estimates that about 70% of Japan's foreign exchange reserves are invested in US Treasury bonds. Given the limited price changes in US Treasury bonds in August, valuation factors are insufficient to explain such a large-scale reduction in holdings, further reinforcing market perceptions that Japan is actively selling US Treasury bonds.

Japan still has other sources of funding. Previously, Japanese Finance Minister Satsuki Katayama stated that future foreign exchange market intervention might also utilize the Federal Reserve's FIMA repurchase facility, which can provide up to $60 billion in liquidity daily without directly selling US Treasury bonds. However, if Japan continues to raise intervention funds by selling US Treasury bonds, supply pressure in the US Treasury market could still intensify.

The yen broke through 155, with stop-loss orders and expectations of interest rate hikes jointly driving the upward trend.

The yen's rally accelerated further after the dollar fell below 155 against the yen. Reports, citing informed traders, indicate that a large number of stop-loss orders were triggered at this key level, while some option barrier prices were breached, forcing option traders to sell dollars. These two factors combined amplified the yen's gains.

Masahiko Loo, senior fixed income strategist at State Street Investment Management, said the 155 level is crucial because it has served as significant support for the USD/JPY pair after previous rounds of Japanese currency market intervention. Low liquidity due to the US holiday could further amplify exchange rate volatility.

Meanwhile, expectations of a Bank of Japan interest rate hike are becoming another important factor supporting the yen. Bank of Japan policy board member Hajime Takada stated last week that a 25 basis point rate hike in September is "not necessarily a done deal," but further rate hikes are possible; Jun Mimura, Japan's top foreign exchange official, stated that his "fighting stance" on the yen issue remains unchanged.

The options market also shows that bets on a stronger yen are increasing. Volatility covering the next policy meetings of the Bank of Japan and the Federal Reserve rose to its highest level since January last Friday, and option premiums used to hedge against yen appreciation risk are near cyclical highs. Van Luu, global head of fixed income and FX solutions strategy at Russell Investments, believes this could only be the beginning of a larger yen rally.

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