To support the yen's "ammunition"? Japan's foreign reserves dropped by $87.8 billion in August, possibly selling U.S. bonds for funding.

The Japanese authorities may have utilized part of the foreign securities in their foreign exchange reserves (including U.S. Treasury bonds) to fund their record-scale currency intervention actions over the past month. According to data on foreign exchange reserves released by the Japanese Ministry of Finance on Monday, as of the end of August, the scale of foreign securities held by Japan decreased by $87.8 billion compared to the previous month. This decline roughly corresponds to the scale of recent interventions conducted by Japan to support the yen. The Ministry of Finance previously confirmed that during the month ending August 26, the authorities invested a total of 15.4 trillion (approximately $98.6 billion) in the foreign exchange market, marking a record monthly intervention scale, some of which was conducted in conjunction with the United States. Although official data did not disclose the detailed composition or maturity distribution of the securities held, market participants generally estimate that about 70% of Japan's foreign exchange reserves are invested in U.S. Treasury bonds. Data indicate that the price of 10-year U.S. Treasury bonds only fell slightly from the end of July to the end of August, suggesting that valuation changes had a very limited contribution to the overall decrease in foreign securities. If this intervention again involves raising funds through selling U.S. Treasury bonds, it indicates that, even as U.S. officials increasingly focus on the stability of the Treasury bond market (especially with the midterm elections approaching), Japan remains willing to pursue this path. U.S. Treasury Secretary Scott Bessent recently announced that the government will double the scale of long-term Treasury bond repurchases over the two months leading up to November 4. This move seems intended to curb upward pressure on long-term yields. Data released on Monday showed that Japan's total foreign exchange reserves decreased by $94.6 billion to $995 billion by the end of August. However, the remaining scale still indicates that if authorities need to intervene again, their available resources remain ample. Foreign currency deposits, as another potential source of intervention funds, decreased by $6.9 billion that month. In addition to the financing channels mentioned above, Japanese Finance Minister Satsuki Katayama suggested after the joint intervention with the United States that Japan could also utilize the Federal Reserve's Foreign and International Monetary Authorities Repo Facility (FIMA Repo Facility) in future interventions. This tool allows Japan to access up to $60 billion in funds per day without selling U.S. Treasury bonds, thereby avoiding shocks to Treasury bond yields and expanding the operational flexibility for potential interventions.