Japan’s foreign reserves fell by a record $79.6 billion in August as authorities used overseas assets to fund their largest-ever intervention in the currency market.
The sharp decline highlights the scale of Tokyo’s effort to support the yen. However, Japan still retains significant financial resources that could be used if further intervention becomes necessary.
Japan’s Foreign Reserves Fall to $1.208 Trillion
Japan’s Ministry of Finance said total reserve assets declined 6.18% to $1.208 trillion at the end of August.
That was down from $1.287 trillion one month earlier and represented the largest monthly decline on record.
The drop came after Japanese authorities stepped up efforts to strengthen the yen against the U.S. dollar.
Foreign Securities Holdings Drop by $87.8 Billion
The biggest decline came from Japan’s holdings of foreign securities.
These assets fell by approximately $87.8 billion during August.
Foreign securities are believed to consist largely of U.S. Treasuries and represent a major part of Japan’s total reserves.
Market estimates suggest that roughly 70% of Japan’s reserve assets may be invested in U.S. government debt.
Japan Spends Nearly $99 Billion Supporting the Yen
The decline in foreign securities closely matched the amount of money required for Japan’s latest currency intervention.
The Finance Ministry said Tokyo spent about ¥15.4 trillion, or $98.66 billion, between July 30 and August 26.
The operation involved buying yen and selling dollars.
It was the largest amount Japan has ever spent on currency intervention within a single month.
Yen Rebounds From Multi-Decade Low
The intervention helped strengthen the yen after it fell to its weakest level in roughly 40 years.
The currency recovered from around 164 yen per dollar to approximately 155.2 by August 3.
It later weakened back toward 160 before strengthening again to around 155 to 156 in early September.
The rapid moves underline how sensitive the yen remains to intervention, monetary policy expectations and global capital flows.
Japan and U.S. Coordinate Yen Intervention
Part of the intervention was reportedly carried out in coordination with the United States.
That marked the first coordinated yen-support operation between Tokyo and Washington since 2011.
The move caught markets by surprise, as investors had seen limited chances of joint action before the intervention took place.
Treasury Sales May Have Funded Yen Purchases
Japan’s latest intervention appears to have involved selling some of its foreign securities in order to obtain the dollars needed to buy yen.
The reserve data does not reveal the exact composition or maturity of the securities that were sold.
However, only limited changes in the value of 10-year U.S. Treasuries occurred between the end of July and the end of August.
That suggests market valuation effects were likely responsible for only a small portion of the $87.8 billion decline.
Japan’s Intervention Could Matter for U.S. Treasuries
The development could also have implications for the U.S. bond market.
If Japan continues to finance currency intervention by selling Treasuries, it would show that Tokyo remains willing to reduce its U.S. government bond holdings in order to defend the yen.
That could become increasingly important as U.S. policymakers focus on maintaining stability in the Treasury market.
U.S. Treasury Expands Longer-Dated Bond Buybacks
The timing also coincides with efforts by the U.S. Treasury to increase purchases of longer-dated government debt.
Treasury Secretary Scott Bessent is preparing to expand buybacks of longer-maturity securities.
The Treasury has said it plans to double these purchases to at least $4 billion per operation through November 4.
The move is intended to support liquidity and help contain longer-term borrowing costs.
BOJ Rate Hike Expectations Support the Yen
Japan’s currency intervention comes as markets increasingly expect the Bank of Japan to raise interest rates.
Recent yen strength has been partly driven by a sharp shift in expectations for BOJ monetary policy.
Markets were close to fully pricing in a 25-basis-point rate hike at the Bank of Japan’s September 17-18 meeting.
A higher BOJ policy rate could provide additional support for the yen and reduce the need for further direct intervention.
Even so, Japan’s record decline in reserves shows that authorities are prepared to use significant financial resources if renewed pressure on the currency emerges.
