Bloomberg Report: Japan Finally Gives In, Selling U.S. Treasuries to Rescue the Yen

The gist is that it was discovered the amount of U.S. Treasury bonds held under Federal Reserve custody has decreased. After cross-checking with the amount of yen Japan has purchased, the two figures match up closely—basically confirming Japan has once again sold off U.S. Treasuries and bought yen in order to prevent the yen from breaking through 160. The question now is: how long can the yen hold?

Japan is quite peculiar. The Bank of Japan’s total assets are approximately $4.62 trillion, over 80% of which consist of Japanese government bonds issued domestically. The BOJ has taken on these domestic bonds and printed corresponding currency, making Japan the country with the highest national debt-to-GDP ratio globally—over 250% of GDP.

Yet paradoxically, Japan is also one of the largest holders of U.S. Treasury bonds. As of the end of April, Japan’s foreign exchange reserves stood at $1.2 trillion—already declining for four consecutive months. The most direct manifestation of Japan’s foreign exchange reserves is its holdings of U.S. Treasuries, which account for more than 80% of its foreign reserves. Japan has essentially used all its foreign exchange to accumulate U.S. debt.

Now, here’s the dilemma: with such a high level of yen-denominated debt, Japan can no longer continue expanding its money supply. To rescue the yen, it must rely on foreign exchange reserves—but over 80% of those reserves are tied up in U.S. Treasuries. Thus, Japan has very little liquid foreign exchange available for immediate use. What can it do? It can only occasionally sell off a small portion to provide temporary relief.

Therefore, some observers argue that this time, the U.S. is actually helping Japan through its crisis—by absorbing the U.S. Treasuries Japan has dumped. There may be some truth to that assessment.

Japan’s ability to generate foreign exchange is now deeply concerning. Its biggest source of foreign exchange, the automotive industry, has been targeted. Meanwhile, its second-largest foreign exchange earner—the tourism sector—has collapsed due to self-inflicted mismanagement. The situation is now extremely serious: as the yen depreciates, the cost of importing raw materials continues to soar. The claim that yen depreciation benefits exports only holds true if input costs remain reasonable. But right now, Japan faces severe shortages in raw materials.

It won’t lead to outright collapse, but the situation is extremely troublesome and will have far-reaching consequences.

Original Article: toutiao.com/article/1864695641870336/

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