US Treasury Major Holder Japan Closes Wallet Amid Historic Yen Weakness... Wall Street Shaken by Anxiety

Selling Short-Term Bonds and Dollars to Defend Against Yen Weakness
Hedging Costs Rise Due to Exchange Rate Fluctuations
Dollar Borrowing Costs Also Increase

[Image source=Yonhap News]

[Asia Economy Reporter Lee Ji-eun] Japan, a major player in the US Treasury market, is causing unease on Wall Street as it reduces its holdings of US Treasuries, citing increased dollar borrowing costs and efforts to defend the yen's value.

According to a report on the 8th (local time) by The Wall Street Journal (WSJ), citing data from the Japanese Ministry of Finance, the Japanese government held approximately $1.2 trillion (about 1,658.4 trillion KRW) in US Treasuries as of August. Japan is considered the largest creditor holding the most US Treasuries.

However, recently, Japan has shown signs of large-scale sales of US Treasuries to defend the declining value of its currency, leading to a slowdown in demand for US Treasuries. WSJ reported, "Institutional investors, including the Japanese Ministry of Finance, are competitively reducing their overseas bond holdings," adding, "Concerns are growing that capital will not circulate smoothly in the global financial market."

The reason Japan is selling US Treasuries is that the widening interest rate gap between the US and Japan, due to the Federal Reserve's (Fed) rate hikes, has caused the yen's value to plummet sharply. To support the rapidly falling yen, the Japanese government sold US short-term Treasuries and dollars, injecting 6.3499 trillion yen (about 61 trillion KRW) into the foreign exchange market last month to purchase yen.

The depreciation of the yen has also increased hedging costs against exchange rate fluctuations when purchasing US assets, which has affected the decline in demand for US Treasuries. WSJ explained that as the yen exchange rate surged, investors had to pay more for exchange rate risk, prompting Japanese investors to turn their attention to 40-year Japanese bonds, which can be purchased without hedging costs despite lower yields.

Additionally, with the Fed's rate hikes causing short-term Treasury yields to catch up with long-term yields, the returns available to Japanese investors have decreased. Previously, Japanese investors could borrow dollars at low short-term US rates and buy higher-yielding long-term Treasuries, but with the inversion of short- and long-term rates, this profit structure no longer works.

Experts observe that the Japanese government has not yet sold enough US Treasuries to significantly impact the market but warn that rapid future sales could cause turmoil in the US Treasury market.

WSJ explained, "Investors already see such signs in the market." After the Japanese government announced on September 22 that it would intervene in the foreign exchange market for the first time in 24 years, the 10-year Treasury yield rose sharply for the second time this year, suggesting that the Japanese government has begun actively purchasing short-term Treasuries.

WSJ added, "There are growing concerns that Japan may sell not only short-term but also long-term Treasuries to defend the exchange rate," and "Moreover, as expectations arise that Japan will maintain its monetary easing policy and increase its domestic bond holdings, investors have withdrawn from the global bond market."

This content was produced with the assistance of AI translation services.