By Dumping US Treasuries to Prop Up the Yen, Japan’s Foreign Currency Reserves Plunged by $95 Billion in August. But Don’t Cry for Japan. These Interventions Are Hugely Profitable

The government is already busy fighting over what to do with the $31 billion in profits on its foreign exchange interventions last fiscal year. By Wolf Richter for WOLF STREET. Japan’s Ministry of Finance disclosed on Monday that its foreign currency reserves plunged by a record $94.6 billion in August, or by 8.7%, to $995 billion at the end of August, from $1.09 trillion at the end of July, showing the effects of the big kahuna joint Japan-US intervention in the foreign exchange markets to put a floor under the plunging yen (red in the chart below). Over the four-month period of May through August, which includes the yen interventions in May and on July 31, foreign currency reserves plunged by $174 billion, or by 14.9%! These foreign currency reserves consist mostly of securities, mostly US Treasury securities. Securities plunged by $87.8 billion in August from July, to $840 billion (double-yellow line in the chart). The remainder of the foreign currency reserves consist of foreign currency deposits at other central banks, such as the MOF’s USD deposits at the Fed’s Reverse Repo facility for Foreign Official and International Accounts (a liability for the Fed). Deposits dropped by $6.9 billion in August, to $155 billion (blue in the chart). Today’s release shows the effects of the interventions on its foreign currency reserves and provides some details. On August 28, the MOF had already disclosed that it had bought back ¥15.4 trillion of yen-cash in the foreign exchange markets during the July 31 intervention, and sold foreign currency to do so. But don’t cry for Japan: As the yellow double-line in the chart above shows, the MOF bought most of these securities, mostly Treasuries, in 2001 through 2011, when the yen was much stronger against the USD than now – in other words, when it could purchase more US Treasuries with fewer yen. In February 2012, foreign currency securities reached $1.20 trillion – which was roughly the peak of the MOF’s foreign securities holdings. At that time in 2012, Abenomics took off. The BOJ started doing massive amounts of QE and pushed interest rates to zero, and then below zero, while the government generated massive amounts of deficits, and over the years, the yen collapsed by 48%, despite the recent rally. Now the MOF is selling those US Treasuries and buying yen with the USD proceeds, thereby getting many more yen for those securities than it had paid for them, realizing huge cash profits in yen terms. Each intervention has generated massive profits, but none more than this one since it was the biggest intervention so far. A slush fund forms from those profits. All cash proceeds in yen of these currency interventions, plus all cash proceeds from the yields paid in foreign currency, go to the Foreign Exchange Fund Special Account (FEFSA), which is legally separate from the government’s General Account so that politicians cannot create some sort of slush fund from the proceeds of those interventions. The collapsed yen has massively amplified these returns as interventions continued over the past few years, while yields in USD on Treasury securities have surged since 2021. For example, for Japan’s fiscal year through March 2026, the FEFSA booked profits of ¥5.06 trillion, according to the MOF ($31 billion at the time). This does not include the profits from the interventions in May and on July 31. The law governing the FEFSA specifies that 30% of the cash proceeds from those interventions and yields have to be retained in the FEFSA as buffer for future losses and to be reinvested in foreign exchange reserves. The remaining 70% are then moved into the government’s General Account, where it’s political slush-fund time. The government is now busy arguing over what to do with the ¥3.54 trillion in foreign exchange profits (70% of ¥5.06 trillion) that were transferred to the General Account – part of it for the fiscal year 2025, part of it for the fiscal year 2026. Takaichi already stated when she became Prime Minister that the slush fund from the foreign exchange profits should be used to pay for her policy initiative of cutting the consumption tax on food from 8% to 0%. In August, a compromise was approved that reduces the consumption tax on food to 1% for two years, with special benefits for low-and middle-income people that effectively reduce that tax to 0%. The stated goal is to not issue new bonds for funding the tax cut, and the government is now debating which slush fund to use for funding the tax cut, with all eyes on the profits from the foreign currency interventions. Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the mug to find out how: Paying down food consumption taxes for Japanese citizens…popular with the young generation, not so much with the pensioners. Good article. I don’t think that the few Japanese pensioners I know would complain about food getting a little less expensive after that tax on food gets cut to 1% or to 0%.