Japan's August foreign reserves post largest-ever drop after record intervention

Japan's foreign reserves experienced their largest-ever decline in August, according to government data released on Monday. The reserves fell to $1.208 trillion, marking a record $79.6 billion drop or 6.18% decrease from $1.287 trillion a month earlier, as reported by the Ministry of Finance (MOF). The primary driver of this decline was a significant reduction in foreign securities, mainly U.S. Treasuries, comprising about 70% of Japan's reserves.

Tokyo's intervention, conducted between July 30 and August 26, amounted to 15.4 trillion yen ($98.66 billion), the largest single-month operation ever recorded. This intervention successfully lifted the yen from 40-year lows near 164 per dollar to as high as 155.20, although it subsequently weakened to around 155 to 156 in early September.

Notably, the intervention included a joint effort with the United States, marking the first coordinated action between the two countries since 2011, an unexpected move that caught markets off guard. Tokyo and Washington have assured markets that Japan could leverage a COVID-19 era Federal Reserve backstop for major central banks to address concerns over the limits of Japan's intervention capacity.

This facility, established in 2020, enables Japan to enhance dollar liquidity without directly selling U.S. Treasuries, potentially reducing funding pressure for Tokyo's intervention efforts.