Where does the huge amount of money for the Japanese government's intervention in the foreign exchange market come from? The answer may be "selling US Treasury bonds"
The Japanese government has provided a large amount of funds for its recent currency intervention measures by selling foreign bonds. In July, the Japanese government's holdings of foreign securities decreased by about $17 billion, with the reduction in foreign securities holdings suggesting a possible sale of US Treasury bonds again. Japan has injected funds equivalent to about 153 trillion yen for market intervention to support its currency. The narrowing interest rate differential between Japan and other countries is a major catalyst for the change in the yen exchange rate trend. The Bank of Japan raised interest rates to 0.25%, the Federal Reserve hinted at a rate cut in September, and the Bank of England lowered its benchmark interest rate. The exchange rate of the yen against the US dollar is approximately 146, up from 153 a week ago
According to the Zhitong Finance and Economics APP, the Japanese government saw a decrease in its holdings of foreign securities in July, which may indicate that the government has raised a significant amount of funds for its recent currency intervention measures by selling foreign government bonds. As per a report released by the Ministry of Finance on Wednesday, Japan's holdings of foreign securities decreased by approximately $17 billion in July, with the total amount dropping to $911 billion. Meanwhile, foreign deposits remained at around $159 billion, and overall reserves slightly decreased to $1.22 trillion.
The reduction in holdings of foreign securities suggests that the Japanese government may once again sell U.S. Treasury bonds to raise funds for currency intervention. In the past month, Japan utilized up to ¥5.5 trillion (approximately $38.1 billion) of foreign exchange reserves to support the yen exchange rate. Particularly on July 11 and subsequent trading days, the yen exchange rate significantly increased, with both appreciations occurring after the release of U.S. economic data.
Japanese Ministry of Finance officials indicated that despite the implementation of intervention measures, Japan's total reserve assets have not decreased, as labor income and capital gains have partially offset intervention expenses.
Currently, the yen to dollar exchange rate is around 146, up from 153 a week ago, reflecting the government's long-standing efforts to counter speculative short positions on the yen are paying off. This year, Japan has injected funds equivalent to ¥15.3 trillion into market interventions to support its currency.
Market analysis suggests that the narrowing interest rate differential between Japan and other countries is a key catalyst for the yen exchange rate trend reversal. The Bank of Japan announced last week an increase in interest rates from the range of 0% to 0.1% to 0.25% and began implementing quantitative tightening policies. Meanwhile, Federal Reserve Chairman Jerome Powell hinted at a possible rate cut as early as September, and the Bank of England lowered its benchmark interest rate for the first time since 2020 last week.
Bank of Japan Governor Haruhiko Kuroda also stated that if inflation and economic conditions align with the central bank's current forecasts, there is a possibility of another rate hike before the end of the year, sending a stronger signal to the market.
Nevertheless, the yen's exchange rate is still below the 10-year average of 118.64 yen to the dollar. While the weak yen has boosted profits for export companies, it has also increased import costs, especially putting pressure on small businesses. A survey conducted by the Japan Chamber of Commerce and Industry in June showed that about 70% of small and medium-sized enterprises hope the yen to dollar exchange rate can be maintained in the range of 110 to 135 yen