Japan sells off U.S. Treasuries to intervene in the currency market? Federal Reserve's custody of U.S. Treasuries decreases by $8.7 billion, sparking market speculation

The size of U.S. Treasury bonds held in custody by the Federal Reserve fell for the first time in a month, while at the same time Japan may have been intervening in the foreign exchange market to support the yen. Market watchers are debating whether Japan is raising funds to buy yen by selling U.S. Treasuries.

According to data released by the Federal Reserve, as of the week ending May 6, the Fed’s holdings of tradable U.S. Treasury bonds for foreign official institutions and international accounts decreased by $8.7 billion to $2.73 trillion. It is estimated that during the same period, Japan’s Ministry of Finance spent about $54.7 billion to buy yen.

As Japan bought a large amount of yen as Fed custody of U.S. Treasuries declined, it indirectly confirms the possibility that Japan is conducting exchange-rate intervention by selling U.S. Treasuries.

Japan is the largest overseas holder of U.S. Treasuries, and to support a highly liquid currency like the yen, intervention funds typically need to be on the scale of billions of dollars.

In Japan’s exchange-rate intervention mechanism, the Bank of Japan serves as an agent executing on behalf of Japan’s Ministry of Finance.

If Japan’s holdings of U.S. Treasuries do indeed decline, it could further push up U.S. Treasury yields. Affected by the U.S.-Iran war, international oil prices have risen significantly, and markets are also concerned that the U.S. fiscal deficit may widen due to the war. U.S. Treasury yields are already on an upward trend.

Rodrigo Catril, senior foreign exchange strategist at National Australia Bank, said: “The change in this account appears to match the timing of the instructions from Japan’s Ministry of Finance to the Bank of Japan to intervene.”

He noted that historical experience shows such interventions are usually sporadic and occasional, but “if this becomes a long-term norm, it could pose a problem for the U.S. Treasury market.”

According to media reports, U.S. Treasury Secretary Bessent plans to visit Japan next Monday, where he is expected to meet with Japanese Prime Minister Takashi Takaichi, Finance Minister Akiyuki Katayama, and Bank of Japan Governor Kazuo Ueda, with exchange-rate issues likely to be one of the main topics.

In November last year, Bessent said his role is to be the United States’ “chief bond salesman,” and U.S. Treasury yields are an important indicator for measuring his work performance.

In November last year, Bessent said his role is to be the United States’ “chief bond salesman,” and U.S. Treasury yields are an important indicator for measuring his work performance.

Yuxuan Tang, head of Asia interest rate and FX strategy at JPMorgan Private Bank Hong Kong, said Japan’s central bank can use foreign exchange reserves stored at the New York Fed, which enables Japanese authorities “to operate during U.S. trading hours—when liquidity in the U.S. Treasury market is at its highest.”

“This approach helps minimize market disruption. For the same reason, they also tend to use short-term government bonds rather than long-term government bonds.”

Shusuke Yamada, a Tokyo-based foreign exchange and interest rate strategist at Bank of America, noted in a report that during several previous periods of Japan’s exchange-rate intervention, the cash portion within Japan’s foreign exchange reserves did not show a significant decline.

“If this time is the same, it would mean that the supply-and-demand situation in the related bond markets could deteriorate by about $70 billion, and the market generally believes that these bonds are mainly U.S. Treasuries,” Yamada said.

(Source: Caixin Global)