Japan Uses Foreign Reserves Securities for Yen Intervention Financing, Likely to Reduce Forex Reserve Securities Including US Treasuries
Data from Japan's Ministry of Finance shows that to finance record yen buying interventions, authorities are likely to reduce foreign reserve securities, including US Treasuries. At the end of August, foreign reserve securities holdings decreased by $87.8 billion compared to the previous month, approaching the amount of intervention during the same period.
From July 30 to August 26, Japan invested 15.4 trillion yen, approximately $98.6 billion to $99.6 billion, setting a record for monthly intervention. The total foreign reserves decreased from about $1.287 trillion at the end of July to about $1.208 trillion at the end of August, a monthly decrease of $79.6 billion, a drop of 6.18%, the largest on record. Foreign currency deposits also decreased by $6.9 billion. The market estimates that about 70% of Japan's foreign reserves are allocated to US Treasuries, most of which were acquired during the dollar-buying intervention about twenty years ago. At the end of August, the price of 10-year US Treasuries only slightly declined compared to the end of July, and the valuation changes do not explain most of the decrease in securities balance.
This is not the first time this year. In May, Japan planned to intervene with 11.73 trillion yen, about $73.4 billion, and foreign reserve securities decreased by $75.6 billion that month, with total foreign reserves dropping by $77.1 billion to about $1.306 trillion. The Federal Reserve's holdings of tradable government bonds for foreign officials also decreased by $8.7 billion in the first week of May. In the first half of the year, the direction of official holdings was consistent with the withdrawal of Japan's foreign reserves. Japan remains the largest foreign holder of US Treasuries, with holdings between $1.1 trillion and $1.24 trillion.
The exchange rate path was first a sharp drop followed by a rebound. The yen was lifted from a nearly 40-year low of about 164 to 1 dollar to a high of 155.20 on August 3, then returned to around 160, and by early September, it was back to 155 to 156. Some operations were conducted jointly with the US, marking the first coordinated yen buying since 2011; reports indicate that the US sold euros to buy yen. Finance Minister Shunichi Suzuki stated that further cooperation cannot be ruled out. Both sides also mentioned the possibility of utilizing the Fed's repurchase facility established for foreign currency authorities in 2020, using US Treasuries as collateral to exchange for dollar liquidity without directly selling Treasuries.
By 2026, cumulative interventions have exceeded 27 trillion yen, breaking previous annual records. The Ministry of Finance does not disclose the types and maturities of securities sold. Officials acknowledge that interventions are one of the factors for the sharp decline in foreign reserves, while also noting that rising yields will depress bond market values. Washington is more sensitive to the stability of long-term US Treasuries; Treasury Secretary Scott Bessent has warned that fluctuations in Japanese government bonds could spill over; the US subsequently announced it would double the scale of long-term Treasury repurchases within two months, until November 4.
In market mechanisms, the assets sold are dollar assets from Japan's foreign reserves, and the assets bought are spot yen. The event-driven trigger is clear: the exchange rate approaching 160 to 164 prompted fiscal funds to enter the market. Funds flowed from US Treasuries and foreign currency deposits to the foreign exchange spot market. Beneficiaries include Japanese companies that need stable pricing for imports and domestic financial institutions on the liability side; those under pressure include long-term US Treasuries and the US Treasury market reliant on official buying. If more transactions shift to the Fed's repurchase facility, the pressure to sell bonds will ease, and intervention ammunition will turn into collateral financing rather than inventory liquidation.
Source: Public Information
ABAB AI Insight
Japan's foreign reserves are not a cash box; they are a set of dollar bond portfolios acquired through historical interventions. At the beginning of this century, when the yen was too strong, Tokyo bought dollars and allocated to US Treasuries; twenty years later, the same batch of securities is being sold to buy back yen. This is different from the one-way interventions after the Plaza Accord in the 1990s and is contrary to the joint "sell yen, prevent appreciation" direction of the US and Japan after the 2011 earthquake. Shunichi Suzuki's reference to the US-Japan joint foreign exchange statement redefines "decisive action" as authorization to intervene against excessive volatility, effectively reusing old inventory as a currency tool.
The capital path is very short: foreign exchange special accounts sell securities or do not renew upon maturity, converting them into dollar cash, and then sell dollars for yen in the spot market. The Fed's FIMA repurchase facility provides a second route—using US Treasuries as collateral to the Fed for overnight dollars, avoiding the need to sell in the secondary market after intervention. The choice between selling or pledging determines whether US Treasury yields jump first. Official holdings from Japan have decreased by about $123 billion from February to June, while China and Hong Kong's official holdings have also been reduced during the same period, bringing foreign official holdings to near historical lows, meaning official buying is no longer a stabilizing cushion for US Treasuries.
Specific comparisons are necessary. During the 1998 Asian financial crisis, Tokyo also used reserves for exchange rates, but at that time, the depth of US Treasuries and Japan's holdings were shallower. After interventions in 2022 and 2024, custodial data also showed a rhythm of "first reducing holdings, then partially buying back." The Swiss National Bank intervened by expanding its balance sheet, while Japan intervened by contracting its existing foreign reserves. In terms of industry positioning, the yen is in a defensive phase, not a capital-exporting phase; US Treasuries are in a phase where the largest foreign creditor begins to compete with exchange rate policies for bonds.
Structural judgments belong to the transfer of pricing power. The mechanism is: when the exchange rate target outweighs the reserve yield target, the world's largest foreign creditor shifts from being a price taker to a temporary supplier, partially transferring the pricing power of long-term US Treasuries from domestic buyers and the Fed back to the foreign official intervention calendar. Coordinated intervention indicates that Washington is willing to exchange some yield risk for orderly yen management to prevent fluctuations in Japanese government bonds from spilling over to US Treasuries. The repurchase facility shifts the conflict from spot selling to collateral financing, transferring the timing rather than the constraint itself.
ABAB News · Cognitive Laws
Reserves are yesterday's interventions, today's ammunition
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