Key facts
- The Japanese yen has fallen to its lowest level against the US dollar since 1986.
- Japan is the largest foreign holder of US Treasury bonds.
- Intervention to support the yen could involve selling US Treasurys, impacting the bond market.
- The yen's weakness is driven by the significant interest rate differential between the US and Japan.
- Japan's Finance Minister has indicated readiness to take action against excessive currency movements.
Japan's yen has fallen to its weakest level against the dollar in nearly 40 years, a development that could pose a challenge to the US bond market. As the largest foreign holder of US Treasurys, any intervention by Japanese authorities to support the yen might involve selling these holdings, potentially impacting the liquidity and stability of the world's largest bond market.
The yen was trading around 162.7 against the dollar early Wednesday, driven by the substantial gap between US and Japanese interest rates, which encourages the carry trade strategy. This strategy involves borrowing in yen and investing in higher-yielding dollar assets.
Despite the currency's slide, Japan's Finance Minister Satsuki Katayama stated on Tuesday that the country is prepared to take "appropriate action" against excessive currency moves. Analysts are questioning the effectiveness of intervention alone, especially while the interest rate differential persists. If Japan is compelled to support the yen over an extended period, it could lead to significant sales of US Treasurys, according to Nigel Green, CEO of deVere Group.
ING's global head of markets, Chris Turner, noted that Japan's foreign reserve data showed a decrease of about $75 billion in foreign securities in May, likely reflecting sales of US Treasurys used in previous efforts to bolster the yen. The upcoming remarks from Federal Reserve Chair Kevin Warsh and the US jobs report could further influence the dollar, while the July 4 holiday might offer a quieter window for potential intervention.