Japan sold $85 billion of reserves as US joined yen defense

Japan sold roughly $85 billion of reserves in late July to support the yen, with the US intervening alongside, according to First Eagle portfolio manager and senior research analyst Idanna Appio, writing in Insurance AUM Journal.

The intervention lifted the yen from 163.7 to 155.5; by Aug. 21 it traded around 158.9, Bloomberg data cited in the Oct. 27 commentary show. Appio describes the yen at the time as the weakest against the dollar since the 1985 Plaza Accord.

For a general account holding unhedged dollar assets, the move is direct hedging arithmetic: a dollar position worth 163.7 yen is worth about 5% fewer yen at 155.5. The retracement to 158.9 recovers part of that gap. Appio notes the Ministry of Finance holds reserves in dollar deposits and securities and does not need to sell Treasuries to fund yen purchases; the commentary does not say whether reserves came from dollar deposits or securities, so the $85 billion does not by itself confirm or rule out Treasury selling.

Appio argues Washington had a yield interest in joint action. Large-scale Treasury sales "could push Treasury yields higher," she writes, an unwelcome outcome given how much US government debt is rolled over at prevailing rates. Joint intervention, in her view, adds buying power and signals that both governments favor a stronger yen.

Appio is explicit that intervention is not the fix. "Intervention is no substitute for addressing the underlying monetary and fiscal policy mix," she writes. The yen, in her account, is exceptionally weak against its own history and nominal and real rate differentials, and faster Bank of Japan hikes alone are unlikely to solve it. She sees a fiscal risk premium showing up in both the yen and Japanese government bonds.

The fiscal picture, she writes, is less precarious than headline debt suggests. Japan has roughly a five-year window in which the relationship between growth and interest rates stays favorable, and its primary deficit has improved more since the Covid era than those of many other major economies. Credible consolidation in that window would lower the risk premium, support the yen and take some burden off monetary policy.