Market News

(Bloomberg) -- Japan likely drew on its holdings of foreign securities, including US Treasuries, to finance its record currency market intervention over the past month, a move that may draw attention from Washington.

Tokyo’s holdings of foreign securities at the end of May dropped by $75.6 billion from April, according to Finance Ministry reserve data released Friday. That scale matches the size of Japan’s recent entry into the currency market to prop up the yen. The ministry confirmed last week that intervention in the month through May 27 hit a record ¥11.73 trillion ($73.4 billion).

A ministry official briefing on the report acknowledged that intervention was among the factors behind the sharp drop in holdings of foreign reserves, adding that the fall was the largest on record.

Treasury sales linked to intervention may not go down well in Washington, where officials have become increasingly focused on the stability of the US government bond market. Earlier this year, US Treasury Secretary Scott Bessent warned Japanese counterparts that volatility in Japan’s bond market could spill over into Treasuries, underscoring his sensitivity to large-scale selling by foreign holders.

A senior Japanese Finance Ministry official speaking on the sidelines of the Group of Seven meeting of finance ministers in Paris last month had said that authorities were mindful of the risks from selling their holdings of US government bonds, as that could lead to an increase in American yields — in turn triggering a counterproductive decline in the yen.

“Japan went ahead with the intervention. So it’s natural to interpret that to mean Washington is willing to tolerate some risk of higher US yields,” said Koichi Fujishiro, an economist at Dai-ichi Life Research Institute.

Speaking in parliament on Friday, Finance Minister Satsuki Katayama said that bold actions — which normally refer to FX intervention — are permitted under the US-Japan joint FX statement, in remarks that appeared to justify Japan’s actions over the past month. She added that the government stands ready to respond appropriately to currency moves at any time if needed, warning speculators that the authorities could take further action.

The report showed foreign currency reserves fell to $1.09 trillion at the end of May, an indication of the large stack of resources Japan can draw on if it needs to intervene again. Foreign currency deposits, another potential source of funds for intervention, were largely unchanged at $162 billion. The price of 10-year Treasuries fell from the end of April, suggesting that a small portion of the fall in the foreign securities will likely be linked to a decline in the valuation of the Treasury holdings.