Japan's Intervention in Yen Triggers Speculation Over Treasury Holdings

Federal Reserve's Treasury Holdings Fall Amid Japan's Intervention

The Federal Reserve's custody holdings of Treasuries fell for the first time in a month, with markets speculating whether Japan offloaded US securities to fund its yen purchases. 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, according to data released by the central bank.

Japan's Ministry of Finance was estimated to have spent about $54.7 billion to buy its currency during the same period. The 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.

The 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 Ahead of Weekly Fed Data Release

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.

Table: Comparison of Fed's Treasury Holdings and Japan's Currency Intervention

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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.

The BOJ acts as the MOF's agent to execute any foreign-exchange intervention. Past intervention episodes show no notable decline in the cash component of Japan's foreign-exchange reserves, according to Shusuke Yamada, foreign-exchange and rates strategist at Bank of America in Tokyo. 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.