A Result of Foreign Exchange Market Intervention

U.S. Treasury bond selling by Japan, China and Korea has to do with foreign exchange market intervention.

Selling of U.S. Treasury bonds is increasing worldwide. The amount already exceeded US$200 billion this year and major countries’ current U.S. Treasury holdings are close to the 2018 level. For example, the net selling by Japan and China, the two biggest holders, is US$69.7 billion and US$98.7 billion this year, respectively. That of South Korea is approximately US$18.9 billion.

According to the U.S. Department of the Treasury, major countries’ holdings totaled US$3.9427 trillion at the end of July, the lowest since November 2018. The figure was US$3.9026 trillion at the end of June this year and decreased US$217.8 billion for the first seven months of this year.

The three Asian countries’ selling has to do with foreign exchange market intervention. This year, the values of the Japanese, Chinese and South Korean currencies dropped 25 percent, 10 percent and 17 percent vis-à-vis the U.S. dollar and the Chinese and South Korean governments intervened by selling the bonds. The Bank of Korea recently announced that its U.S. dollar selling intervention was US$8.311 billion in the first quarter.

The Bank of Japan has never intervened in the forex market since 1998. Japan’s selling from January to July this year is because U.S. Treasury bond yields fell as hedging costs rose. However, the bank may change its policy with the yen-dollar exchange rate about to exceed 145 yen per U.S. dollar. Finance Minister Shunichi Suzuki expressed his concerns on Sept. 14, saying that any measures can be taken in the interest of market stability and the government will immediately and continuously intervene if it decides to intervene.

Rising Treasury bond yields are another reason for the selling. The United States’ current interest rate policy is raising the yields and the Fed’s quantitative tightening is accelerating the rise by causing bond transfer from the Fed to the market where Treasury bond inflow from multiple countries is increasing at the same time.

China has sold the bonds since 2018, when its trade disputes with the United States started. At the end of July this year, China’s U.S. Treasury bonds totaled US$970 billion, the lowest level since May 2010. According to experts, this is to diversify forex reserves rather than to retaliate against the United States or avoid potential financial sanctions with its ally Russia under Western sanctions.

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