Japan's yen at a 40-year low could become America's bond-market problem

• Japan's yen has fallen to a 40-year low, raising expectations of another currency intervention.
• The bigger question for Wall Street is whether Japan will have to sell US Treasurys.
• Higher US yields, the Iran war, and carry trades continue to weigh on the Japanese currency.

Japan's yen has tumbled to a nearly 40-year low against the dollar, fueling expectations that authorities could intervene to support the currency.

That possibility is drawing attention beyond the foreign-exchange market because supporting the yen could require Japan to tap its foreign-exchange reserves, which include a massive portfolio of US government bonds.

Japan is the largest foreign holder of US Treasurys, meaning any large-scale reserve sales could ripple through the world's biggest bond market.

Early on Wednesday, the yen was trading around 162.7 against the dollar, as investors continued to favor the greenback amid the wide gap between US and Japanese interest rates.

The move came even after Finance Minister Satsuki Katayama said on Tuesday that Japan stood ready to act against excessive currency moves. She said authorities would take"appropriate action"on currencies at any time as needed.

If Japan steps into the market, investors will be watching not only the yen but also the country's dollar-denominated reserve assets, including US Treasurys.

"When the BoJ sells FX, it is selling part of its securities book," ING's global head of markets Chris Turner wrote in a note.

Japan's Ministry of Finance's foreign reserve data showed its holdings of foreign securities fell by about $75 billion in May, which likely reflected sales of US Treasurys used to finance earlier efforts to support the yen, Turner added.

With potentially dollar-supportive events this week — including remarks from Federal Reserve Chair Kevin Warsh at a panel on Wednesday and the June US jobs report on Thursday — Turner said the US's July 4 holiday on Friday could provide a quieter window for any intervention.

Nigel Green, the CEO of financial advisory firm deVere Group, said investors should focus less on whether Japan intervenes than on how it funds any intervention.

"If authorities are compelled to step up support for the yen over a prolonged period, global investors could suddenly find themselves confronting an entirely different risk: one of the world's largest foreign holders of US Treasuries becoming a more significant seller," Green said.

Yen under strain

The yen has been under pressure as US interest rates remain well above Japan's. That has encouraged investors to borrow cheaply in yen and invest in higher-yielding dollar assets — a strategy known as the carry trade.

That trade briefly unraveled in the summer of 2024 after the Bank of Japan unexpectedly raised interest rates, triggering sharp swings across global stocks, bonds, and currencies.

The war in Iran has added to that pressure on the yen as energy costs mount for Japan, a major oil importer.

Japan's booming stock market has also contributed to yen weakness, as many overseas investors piling into Japanese stocks hedge against further weakness in the yen at the same time, according to IG market analyst Fabien Yip.

Analysts are increasingly questioning whether intervention alone can reverse the yen's slide while the interest-rate gap remains wide.

Pepperstone's head of research, Chris Weston, said the move has evolved beyond a traditional carry trade, with momentum and trend-following investors continuing to build long-dollar positions as the currency pair pushes to fresh highs.

"Without a meaningful shift in US interest rate expectations, global risk appetite or coordinated international intervention, selling dollars against the yen remains a difficult proposition," Weston wrote.

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