Japan's Federal Reserve Holdings Show Decline Amid Signs of Intervention-Driven Debt Reduction

Federal Reserve's Custody Holdings of Treasuries Fall Amid Japan's Intervention

The Federal Reserve's custody holdings of Treasuries fell for the first time in a month as market participants debated whether Japan offloaded US securities to fund its yen purchases. According to data released by the central bank, the amount of marketable US Treasury securities the Fed holds for foreign official and international accounts slipped by $8.7 billion to $2.73 trillion in the week to May 6.

Japan's Ministry of Finance was estimated to have spent about $54.7 billion to buy its currency during the same period. A drop in the Fed's holdings is consistent with the possibility that Japan's intervention involved Treasury sales. Japan is the largest foreign holder of US government debt, and supporting a deeply liquid currency such as the yen typically requires billions of dollars of intervention.

A decline in Japan's Treasury stockpile may put further upward pressure on US yields, which are already being driven higher by surging oil prices and concern the Iran war will widen America's fiscal deficit. History suggests interventions are likely to be sporadic, but if this becomes a regular theme, it could become an issue for the US Treasury market.

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US Treasury Secretary Scott Bessent Visits Japan Amid Currency Market Concerns

The weekly Fed data were released just days before US Treasury Secretary Scott Bessent visits Japan, where he is expected to meet with Prime Minister Sanae Takaichi, Finance Minister Satsuki Katayama, and BOJ Governor Kazuo Ueda. Bessent will likely discuss recent moves in the currency market, the Nikkei newspaper reported Thursday.

Foreign-Exchange Intervention by Japan and Its Impact on US Treasury Market

The BOJ's ability to draw on reserves held with the New York Fed allows Japan's authorities to carry out operations during US trading hours when Treasury market liquidity is at its peak. This approach helps minimize disruptions. They also prefer to use Treasury bills rather than long-dated Treasuries for the same reason.

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The BOJ acts as the MOF's agent to execute any foreign-exchange intervention. The New York Fed in January requested indicative quotes on the yen exchange rate, triggering a jump in Japan's currency. Bessent said in November that his job is to be the nation's "top bond salesman," and US yields are a strong barometer for measuring his success.

Assessing the Impact of Japan's Intervention on US Treasury Market

Past intervention episodes show no notable decline in the cash component of Japan's foreign-exchange reserves, Shusuke Yamada, foreign-exchange and rates strategist at Bank of America in Tokyo, wrote in a research note. Assuming the same holds this time, this would imply a deterioration in supply-demand conditions of around $70 billion in the relevant bond markets, generally assumed to be US Treasuries.