Japan may sell US Treasuries to support the yen, potentially affecting US debt demand and interest rates following costly but minimally impactful interventions.
In recent weeks, the Japanese authorities are believed to have engaged in foreign-exchange intervention to support the weakening yen, which has reached its lowest levels against the dollar in several decades. According to a report by Bank of America Corp., Japan likely intervened on two separate occasions, utilizing cash reserves to strengthen its currency.
The report, authored by Bank of America’s strategists Shusuke Yamada, Izumi Devalier, Mark Cabana, and Meghan Swiber, suggests that future efforts to shore up the yen could involve Japan's Ministry of Finance deploying its holdings of US Treasuries. This strategy could have repercussions on the US funding and debt markets, as it would reduce demand for US Treasuries and potentially lead to a modest rise in rates and a tightening of spreads on the Secured Overnight Financing Rate (SOFR).
On April 29, the yen plummeted to a 34-year low of 160.17 per dollar but then experienced a sharp rally in light trading conditions. Following the Federal Reserve’s policy meeting on May 2, the yen surged more than 3% in the latter hours of US trading. Despite no official confirmation from Japanese officials regarding these interventions, analysis of central bank accounts by Bloomberg suggests that around $35 billion was spent in the first instance and $23 billion in the second to prop up the currency.
The interventions thus far seem to have had a "minimal impact" on Treasury markets, with Japanese authorities drawing from their reservoir of reserve deposits rather than security holdings. However, Bank of America and other market observers predict that the supply of Treasury bills will decline in the upcoming months due to a reduction in issuance by the US government. This could be further exacerbated by decreased demand from Japan should they continue to intervene in the currency market.
The Bank of America team pointed out, "Incremental intervention, especially if done by reducing bill holdings, should have a modest impact especially in the context of net negative bill supply through June." The current state of affairs indicates a watchful eye is being kept on Japan's currency maneuvers, as they hold significant implications for both the yen's valuation and the dynamics of the US Treasury market.
