The following
is my answer to a Quora question: “Should
we be concerned about the potential sale of US Treasuries by Japan to help fund
its intervention in the currency markets?”
Washington intervened alongside Tokyo in August 2026, after the yen
fell to 163.73 against the dollar, its weakest level in nearly four
decades. The mechanism gave away the
fear. The New York Federal Reserve sold
euros, not dollars, to buy yen. Japan
tapped the Federal Reserve’s own Foreign and International Monetary Authorities
Repo Facility, created in March 2020, to borrow dollars against its Treasury
holdings as collateral, rather than selling those Treasuries on the open
market. Both governments avoided a
straightforward Treasury sale. That
avoidance is the tell. Washington feared
the scenario where Japan, the largest foreign holder of US debt at US$1.14
trillion, dumped bonds to fund its own defence. This would drive American borrowing costs
higher at the worst moment. Borrowing
against the asset instead of selling it is not a technicality. It is the difference between adding fresh
supply to a fragile market and avoiding that market altogether.
The Intervention Failed
The yen rallied briefly to 157.96, then drifted back toward where
it started. The reversal was unsurprising. Both countries avoided a normal Treasury sale.
This is an admission that the market
cannot absorb one. Treasury Secretary
Scott Kenneth Homer Bessent confirmed the diagnosis. Asked why Washington acted, he told CNBC: “People
have bad information. I have asymmetric
information. So, I think the market
should think: why would we have joined the Japanese in the intervention at this
time? Do we know something the market
does not know?” That is trading
language, not stewardship language. A
Treasury Secretary describing his own information advantage over the market he
is meant to steward is not projecting confidence. He is describing a position, the way a hedge
fund manager describes a trade, and the market read it that way once the rally
faded within days.
Dollar Privilege is Cracking
The dollar’s share of global reserves fell from above 70 per cent
in 2000 to 56.77 per cent by late 2025.
Central banks have bought over 1,000 tonnes of gold every year since
2022, more than double the pre-2022 pace.
China’s own Treasury holdings dropped to US$633.4 billion in June, the
lowest since September 2008, redirected instead into German and Swiss
bonds. Washington’s 2022 decision to
freeze roughly US$300 billion of Russia’s reserves is the anecdote every
central banker weighing this decision now cites privately. A reserve asset that can be frozen by
political decision is not a pure reserve asset.
It is a loan to a government that can cancel repayment on political
grounds, and that lesson did not stay confined to Moscow. Every non-aligned reserve manager absorbed it
at once, and gold purchases accelerated the same year the freeze happened, not
years later.
US Debt Made This Worse
National debt sits above US$37 trillion. Net interest costs hit US$963 billion over
ten months of fiscal 2026, roughly US$3.18 billion a day. A 30-year Treasury auction cleared at 5.216
per cent in August, the highest yield on that maturity since 2001, with demand
weaker than dealers expected and the stop-out yield pricing above the level
dealers had anticipated. The Treasury
Borrowing Advisory Committee has already flagged a US$1.45 trillion funding
shortfall for fiscal 2027 to 2028 at current auction sizes. A government this leveraged has no spare room
to absorb a foreign ally’s bond sale gracefully. This is why it chose euros over its own
currency’s core asset to fund the rescue in the first place. Every additional dollar borrowed to plug that
shortfall competes with the market’s remaining appetite for the exact
securities this intervention was meant to protect.
Japan’s own central bank raised rates to 1 per cent in June 2026,
the highest level since 1995, on a split 7-1 vote. It then held at 1 per cent in July, an 8-1
decision, even as it forecast core inflation would climb above its 2 per cent
target within the year. Prime Minister
Sanae Takaichi has since appointed a new board member widely read as dovish,
tilting the committee back toward caution just as the currency needed the
opposite signal.
The caution is not pure timidity.
Japan carries a debt-to-GDP ratio near 230 per cent, the highest of any
major economy on earth, and every rate increase raises the government’s own
debt servicing cost, a policy trap that limits how fast the BOJ can move
without triggering a fiscal problem of its own making. That earns Japan some sympathy. It does not change the outcome. The Bank of Japan has managed the symptom
slowly enough to need a joint intervention with Washington, and slow enough
that the intervention became necessary rather than optional.
Yes, this should concern us.
Not because Japan sold Treasuries.
Because Japan and America both structured an intervention to avoid that
sale, revealing a market too fragile to absorb it, propping up a currency whose
central bank still will not move fast enough to fix the cause, constrained by a
debt load large enough to make the correct policy politically dangerous to
deliver.
Terence
Nunis | Executive Chairman, Equinox Zenith | Author, The 1% Playbook: The
Billionaire Cheat Code
