Japan Sells Record U.S. Debt to Fund Yen Intervention, Reserves Fall Below $1 Trillion

Original title: "Japan Suspected of Selling U.S. Debt to Fund Record Yen Intervention, 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, reigniting market concerns about U.S. debt supply pressure.

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 fell by $87.8 billion from the previous month, a decline closely matching the scale of that month's intervention. The ministry had previously confirmed that in the month through Aug. 26, authorities used about 15.4 trillion yen (approximately $98.6 billion) for currency intervention, a monthly record, 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 scale of this intervention and the potential impact of its financing method on the U.S. Treasury market have drawn significant market attention. Treasury Secretary Bessent recently announced that the government will double the scale of long-term bond buybacks in the two months through Nov. 4, a move interpreted by the market as an effort to curb rising long-term yields, indicating that U.S. officials are increasingly focused on the stability of the Treasury market.

Foreign Securities Holdings Plunge, Clear Signs of U.S. Debt Selling

Ministry of Finance data show that Japan's foreign securities holdings at the end of August fell by $87.8 billion, close to the scale of that month's intervention. Although the data do not disclose the specific composition and maturity distribution of securities holdings, market participants generally estimate that about 70% of Japan's foreign exchange reserves are invested in U.S. Treasury bonds.

In terms of market prices, the price of 10-year U.S. Treasury bonds at the end of August fell only slightly from the end of July, meaning that valuation changes contributed very little to the decline in foreign securities holdings, further supporting the judgment that Japan actively sold U.S. debt.

Record Intervention Scale, U.S.-Japan Joint Action

Ministry of Finance data show that in the month through Aug. 26, Japanese authorities used about 15.4 trillion yen for currency intervention, the largest single-month yen intervention to date, with some operations conducted jointly with the United States.

The intervention occurred against a backdrop of significant pressure on the yen exchange rate, prompting authorities to intervene heavily to support the currency. The form of joint intervention also indicates that coordination between the U.S. and Japan on exchange rate issues has deepened.

As Japan again funds intervention by selling U.S. debt, U.S. officials are increasingly focused on the stability of the Treasury market, especially with midterm elections approaching. Treasury Secretary Bessent recently announced that the government will double the scale of long-term bond buybacks in the two months through Nov. 4, a move widely seen as aimed at curbing long-term yields.

Japan's actions show that even as U.S. officials grow more concerned about Treasury market stability, Tokyo is still willing to sell U.S. debt 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 to $995 billion, authorities believe the remaining reserves are still sufficient to support any future intervention. In addition to foreign securities, foreign currency deposits, another potential source of intervention funds, also fell by $6.9 billion at the end of August.

Notably, Japanese Finance Minister Satsuki Katayama said after the U.S.-Japan joint intervention that future interventions may also draw on the Federal Reserve's Foreign and International Monetary Authorities (FIMA) Repo Facility. This tool allows Japan to access up to $60 billion in liquidity per day without selling U.S. debt, effectively limiting the impact on U.S. Treasury yields and further expanding potential intervention capacity.