Japan’s finance ministry is estimated to have spent around USD 54.7 billion on yen intervention.
NEW YORK – Federal Reserve data showed holdings of US Treasury securities held on behalf of foreign central banks and institutions fell for the first time in a month, amid speculation that Japan intervened to support the yen.
The development has fuelled speculation that Tokyo sold US government bonds to finance purchases of its domestic currency, according to Bloomberg.
Based on Federal Reserve data through 6 May, holdings of US Treasury securities for foreign and international official accounts fell by USD 8.7 billion to USD 2.73 trillion.
During the same period, Japan’s finance ministry is estimated to have spent around USD 54.7 billion on intervention to support the yen.
The decline in holdings is seen as consistent with the possibility that Japan sold US government bonds as a funding source for foreign exchange market intervention.
If Japan did sell part of its Treasury portfolio, the move could push US bond yields higher at a time when they are already under pressure from surging oil prices and concerns that the Iran war could widen the United States’ fiscal deficit.
Japan remains the largest foreign holder of US government debt.
To support a liquid currency such as the yen, intervention typically requires billions of dollars.
“Movements in those accounts appear to correlate with instructions from Japan’s finance ministry to the Bank of Japan to intervene,” said Rodrigo Catril, senior foreign exchange strategist at National Australia Bank in Sydney.
He said such interventions are typically sporadic.
However, if they become a regular pattern, this could pose problems for the US bond market.
The Fed’s weekly data was released just days before US Treasury Secretary Scott Bessent’s visit to Japan.
During the trip, he is scheduled to meet Prime Minister Sanae Takaichi, Finance Minister Satsuki Katayama and Bank of Japan Governor Kazuo Ueda.
According to a Nikkei report, discussions are likely to include recent movements in the currency market.
Yuxuan Tang, head of Asia rates and foreign exchange strategy at JPMorgan Private Bank in Hong Kong, said the BOJ’s ability to use foreign exchange reserves held at the Federal Reserve Bank of New York allows Japan to intervene when liquidity in the US Treasury market is high.
In his view, Japan is also likely to use short-term Treasury securities rather than longer-duration bonds to minimise market disruption.
The BOJ acts as an agent for Japan’s finance ministry in all foreign exchange interventions.
Meanwhile, Shusuke Yamada, an analyst at Bank of America in Tokyo, said previous episodes of intervention had not shown a significant decline in the cash component of Japan’s foreign exchange reserves.
If a similar pattern emerges this time, it could indicate a deterioration in the supply-demand balance of around USD 70 billion in the relevant bond market, which is generally assumed to be the US Treasury market. (DK/ZH)
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