Japan's U.S. Treasury holdings drop most in 3 years, yen defense suspected

Japan's holdings of U.S. Treasury bonds saw their steepest decline in nearly four years in May, with a reduction of $66.7 billion. This significant sell-off, totaling $1.1143 trillion, marks the largest decrease since September 2022, according to U.S. Treasury International Capital (TIC) data.

The substantial sale of U.S. debt by Japan, the largest foreign holder, is widely interpreted as an effort to support the yen. The Japanese currency had been weakening against the dollar, nearing the 160 yen per dollar mark in mid-April. In response, the Bank of Japan and the government intervened in the foreign exchange market, spending approximately 11.73 trillion yen (about $78 billion) in the month following April 28.

This strategy of selling short-term U.S. Treasury bonds allows Japan to raise funds with minimal loss due to their short maturity. It also places less burden on the U.S. bond market. Such interventions by Japan typically occur with tacit U.S. approval. For Japan, utilizing short-term bonds instead of long-term ones is a more advantageous way to maintain foreign reserves.