Japan’s record yen defence drains foreign reserves
Japan’s foreign reserves fell by $77bn in May after record yen-buying intervention, raising scrutiny over US Treasury sales
Japan’s foreign reserves fell sharply in May after Tokyo carried out its largest-ever currency intervention to support the yen, underscoring the rising cost of defending the currency as it remained under pressure near the 160-per-dollar level.
Data cited by Reuters showed Japan’s foreign reserves dropped by US$77 billion in May to US$1.306 trillion, down from US$1.383 trillion in April. The fall followed a separate disclosure that Japanese authorities spent 11.7 trillion yen, or about US$73.13 billion, to buy yen and sell dollars in the period to May 28.
Japan had tapped the foreign securities portion of its reserves, including US government bonds, to fund the intervention. Japan’s foreign securities holdings at the end of May fell by US$75 billion from April, broadly matching the scale of Tokyo’s recent yen-buying operation.
Japan’s Finance Ministry confirmed last week that spending on currency intervention in the month to May 28 had reached a record 11.73 trillion yen. Ministry officials also acknowledged that the intervention was one of the main reasons behind the steep fall in foreign assets, describing the decline as the largest on record.
US Treasury market comes under scrutiny
The intervention has raised questions about its possible impact on the US bond market. When Japan intervenes to support the yen, it typically sells dollar assets and buys yen.
Since a large portion of Japan’s foreign reserves is believed to be held in foreign securities, including US Treasuries, any large-scale disposal is sensitive for Washington and global markets.
Selling US government bonds to fund yen-buying could be uncomfortable for the United States, as US officials are closely watching the stability of the Treasury market.
Earlier this year, US Treasury Secretary Scott Bessent warned Japanese counterparts that volatility in Japan’s bond market could spill over into US Treasuries, reflecting concern over large foreign holders selling bonds in significant volumes.
Senior Japanese Finance Ministry officials also said during a G7 finance ministers’ meeting in Paris last month that Tokyo was aware of the risks of selling its US Treasury holdings. Heavy selling could push US bond yields higher and eventually add fresh pressure on the yen, the very problem Japan is trying to contain.
Koichi Fujishiro, an economist at Dai-ichi Life Research Institute, said Japan’s decision to intervene suggested that Washington may be willing to tolerate some risk of higher US Treasury yields.
Tokyo still has a large war chest
Despite the sharp fall, Japan still has substantial reserves available if officials decide further intervention is needed. Reuters reported that Japan’s reserves remained the world’s second-largest after China’s, making them a key indicator for how much more Tokyo may be willing or able to spend to stabilise the yen.
Japan’s overall foreign reserves stood at US$1.09 trillion at the end of May, while foreign-currency deposits, another possible source of intervention funding, remained steady at about US$162 billion. It also noted that part of the fall in asset value may have reflected a decline in the market value of 10-year US Treasuries since the end of April.
The latest data did not specify the types or maturities of bonds held by Japan. However, market participants estimate that about 70% of Japan’s foreign reserves are invested in US government bonds, while Federal Reserve custody data also points to the likelihood that Japan sold US securities to raise funds for yen-buying during the recent intervention.
The yen remained close to the 160-per-dollar threshold, keeping investors alert to the possibility of further official action. Reuters reported that Finance Minister Satsuki Katayama had repeated Japan’s readiness to take decisive action against excessive exchange-rate volatility.
