Yen Breaks Through 155, Hitting a Six-Month High! Japan Reportedly 'Sold US Treasuries to Save the Yen', Foreign Exchange Reserves Fall Below $1 Trillion

The underlying reasons can be glimpsed from a set of data released simultaneously by Japan's Ministry of Finance: at the end of August, Japan's foreign exchange reserves plummeted by $94.6 billion in a single month to $995 billion, falling below the trillion-dollar mark; Of this, foreign securities holdings fell by $87.8 billion, roughly matching the record $98.6 billion intervention for the month. Media such as Wallstreetcn reported that Japan is suspected of raising funds for this largest-ever yen intervention by selling off U.S. Treasuries.

155 Losses: Stop-Loss Orders Have Taken Over The Baton

155 has never been an ordinary integer threshold. After previous interventions, 155 has served as the bottom of the exchange rate, and this breakout is highly significant. Because this "bottom" has been repeatedly verified, a large number of positions betting on yen weakness have accumulated above it; Once it falls, these positions turn from market stabilizers into fuel.

But stop-losses only change the speed of the market, not the direction; the direction is determined by positions. JPMorgan Chase's chief Japan FX strategist Junya Tanase team judges that if USD/JPY falls below 155, the recovering of existing yen shorts may accelerate appreciation — the lower the price, the more short sellers are forced to buy back yen. Following this logic, Rodrigo Catril, strategist at National Australia Bank, bluntly stated that USD/JPY is "very likely" to test 152.27 and 152.10, the latter being the strongest support levels for USD/JPY this year; Sakai from Mitsubishi UFJ also set the next target in the 152 range.

Where Did The 15.4 Trillion Yen Of Intervention Come From?

Stop-loss orders explain the speed of the market, but not the confidence of the market. The confidence of the yen comes from real financial intervention over the past month. The Ministry of Finance previously confirmed that from July 30 to August 26, authorities intervened in the foreign exchange market with a total of about 15.4 trillion yen (approximately 98.6 billion USD), setting a monthly record, with some operations jointly implemented with the United States.

The source of this money is basically answered in the foreign reserve data released on September 7. At the end of August, total foreign exchange reserves decreased by $94.6 billion to $995 billion, with foreign securities holdings down $87.8 billion and foreign currency deposits down $6.9 billion in the month. Two details have led the market to favor a "proactive selling" rather than "valuation shrinkage": First, the price of 10-year U.S. Treasuries fell only slightly at the end of August compared to the end of July, so valuation changes contributed very little to the decline; Second, the market generally estimates that about 70% of Japan's foreign reserves are invested in U.S. Treasuries, with $87.8 billion in securities reductions comparable to $98.6 billion in intervention spending.

In other words, Japan has chosen the most direct funding path: selling US Treasuries to exchange for dollars, then using dollars to buy back yen. Xu Qiyuan, a researcher at the Chinese Academy of Social Sciences, commented: Compared to the huge foreign exchange market, the actual impact of intervention is limited; its role is more policy signals. But beyond signals, the financing methods themselves are creating new problems.

The Price Of Selling US Treasuries To Save The Yen

Japan is the largest overseas holder of U.S. Treasuries, with a position of about $1.1 trillion. This means Japan's way of saving the yen is precisely to add more supplies to the already stressed U.S. Treasury market. At this moment, U.S. Treasuries are being pushed to multi-year highs by sticky inflation, fiscal deficits, and oversupply, with the 10-year yield approaching 5% and the 30-year yield rising to a nearly 20-year high of 5.24%. The selling comes from the largest overseas buyers, which is the combination the U.S. Treasury market least wants to see.

The U.S. was not unaware and its response was already on the table. Treasury Secretary Bescent announced that the scale of long-term Treasury repurchases would be doubled within the two months ending November 4: issuing short-term bonds and buying long-term bonds directly to support long-term prices. A more fundamental solution pointed to the Fed's FIMA repurchase facilitation: this tool established during the 2020 pandemic allows foreign central banks to borrow US dollars from the Fed using U.S. Treasuries as collateral, with a single-day cap of $60 billion. After joint intervention, Japanese Finance Minister Satsuki Katayama hinted at possible future use, while Bescent publicly suggested expanding the cap.

The intention is easy to understand: to have Japan take the path of "borrowing debt on debt" next time it needs dollars, rather than "selling bonds for money," so that U.S. debt is spared from new selling pressure, and Japan still gets ammunition to intervene. But changing the financing path does not mean the contradiction itself disappears. Narrowing the US-Japan interest rate gap fundamentally depends on Japan raising interest rates, and raising rates will increase Japan's fiscal interest burden. Every way out leads to a dilemma for another policy.

The Main Credit For This Rally Is Not Intervention

Returning to the market itself, an easily overlooked fact is that on Monday, the Japanese government did not intervene on Monday's big bullish candle. A review shows that during the Tokyo session, the USD/JPY fell about 1.5 yen within 40 minutes, while the joint intervention by the US and Japan on July 31 moved several yen within minutes; The Ministry of Finance's daily account data showed no signs of official yen buying, and neither the US nor Japan claimed this rally.

What truly drove appreciation was the repricing of the Bank of Japan meeting on September 18. Overnight index swaps have priced in a 25 basis point rate hike at that meeting as high as 97%; Policy committee member Hajime Takada previously made it clear that future rate hikes will not rigidly be limited to 25 basis points, and under normal circumstances, consecutive hikes are possible: if implemented in September, it will be the fastest tightening pace during Kazuo Ueda's term. The interest rate side is also in favor: Japan's 10-year government bond yield broke through 3% on September 1, the first time since 1996 (historical data).

However, CFTC data shows that as of the week ending September 1, speculative yen net short positions did not decrease but actually increased by 28,900 contracts, reaching 92,200 contracts. The Bank for International Settlements estimated in its June quarterly report that global yen arbitrage trading volume reached 1.3 to 1.7 trillion USD (historical data). In other words, the much-discussed "large-scale arbitrage liquidation" has yet to truly happen; what has been done so far is only a repricing of yen financing costs. This not only indicates that the yen has ample fuel, and the 92,200 short positions could be triggered at any time, but also means the reverse risk is real. If the Bank of Japan's hawkish stance falls short of pricing, volatility will be compensated in the opposite direction. Today's release shows Japan's Q2 final GDP growth rate at an annualized rate of 1.4%, below the market estimate of 1.8%. Whether the moderately expanding economy can sustain the fastest tightening pace in history is the biggest suspense at next week's meeting.

The Next Three Observation Points

First, the Bank of Japan meeting on September 18. The 97% rate hike pricing means the suspense is no longer about whether to increase it, but whether the signal is hawkish enough. In Catril's words, "The yen is at a crossroads": raising rates is only a necessary condition; to maintain the upward momentum, the Bank of Japan must reiterate that another rate hike before year-end is greater than not at all[²].

Second, Friday's US August CPI. It is not only the last major data release before the Fed's September 16 meeting, but also directly determines the direction of the US-Japan interest rate differential. Interestingly, if both sides add 25 basis points each, the spread of about 2.6 percentage points would remain almost unchanged.

Third, the U.S. quarterly refinancing on November 4. Becent's doubling of its buyback is only a transitional arrangement; it will be clear how the long-term bond issuance structure will be adjusted then; On Japan's side, foreign reserves below one trillion yuan are still sufficient to support subsequent interventions, but if FIMA fails to "take over" in time, the "selling US Treasuries to save the yen" could repeat itself. Will the yen hold above 152 or reverse to cover the market? The answer will be revealed at these three key points.