Japan’s never-ending efforts to shore up the yen have begun to show up in the one market it can least afford to upset, let alone destabilise: US Treasuries. The pattern is now visible across Treasury flows and custody holdings. It is also exposing an uncomfortable feedback loop between Tokyo’s ongoing currency defence and Washington’s funding costs.

At the centre of the issue is scale. Japan holds around $1.2 - $1.24 trillion in US government debt, a figure higher than any other country in the world and almost double the amount held by neighbouring China – itself locked into a protracted sell off of the same US Treasuries in recent months.

In Tokyo, the Bank of Japan’s stock of Treasuries has long functioned as both a key reserve asset but also as a policy buffer in dealings with Washington. However, in recent months it has started to behave more like a pressure valve than a fixed safety net.

Defending the yen has already proved costly with Japan estimated to have spent around JPY11.7 trillion, roughly $72bn, in a single month to support its ailing currency.

That intervention drew directly on foreign exchange reserves and over the same period, as a result, reserves dropped significantly in what is the steepest decline on record, according to Japan’s Ministry of Finance.

The mechanics of the sell-off are straightforward in that a yen weakening sharply sees Japanese authorities sell foreign currency assets to buy more yen. A significant share of those liquid assets sold off were US Treasuries, but as those securities are sold on or allowed to mature without any form of reinvestment, the holdings show up in US custody data as a drop in foreign official demand.

The sting of drawdown

As such, US Treasury International Capital (TIC) data has, in the first half of 2026 shown a softening in foreign official holdings of Treasuries that essentially syncs with Japan’s own reserve drawdown.

The correlation is not perfect, but the direction is consistent. The dots connect themselves and finger pointing at Japan has started.

For the markets, the implication is less about a single monthly move though, and more about the emergence of a constraint. In this regard, Japan is not merely managing a currency. It is managing a global portfolio whose largest component just happens to be US government debt – at the same time US yields remain structurally higher than Japan’s.

This uncomfortable dynamic sits in the rate differential. The yen’s long-term weakness is driven in large part by the gap between US interest rates and those seen in Japan. The Federal Reserve has kept policy tight, with US yields elevated relative to its international peers. Japan, on the other hand, only recently made moves to prise itself loose of a 30 year period of ultra-loose policy.

Just over two years ago, in March 2024, the Bank of Japan (BoJ) ended negative interest rates for the first time in 17 years by lifting short-term rates above zero. At the time a symbolic shift away from the most extreme monetary easing framework in the developed world, the move was seen as overly cautious in that Japanese yields remained mired far below US levels. This left the yen structurally exposed.

And this was where the loop became self-reinforcing. Japan sells US Treasuries to defend the yen, but those sales serve to increase supply in an already rate-sensitive market. As such, the higher US yields that follow lead to a widening of the existing interest rate gap with Japan. In turn this weakens the yen further.

The medicine then becomes the poison.

Currency traders around the world have long described the Japanese yen as a funding currency for global carry trades, precisely because of this yield differential. And when US yields rise faster than Japanese yields as is so often seen, the incentive to short yen positions increases. To this end, any Treasury-driven rise in US yields therefore risks intensifying the original problem that Tokyo, through the BoJ, is trying to solve.

All the time, Washington has been watching closely as the US Treasury market is still the functioning backbone of global finance with Japan its single largest foreign official creditor. Because of this, any sustained reduction in Japanese demand matters at the margin, particularly at a time of geopolitical strain on so many fronts and as US fiscal issuance remains elevated.

As US Treasury public remarks on global financial stability have already signalled concern about spillovers from foreign bond market stress into Treasuries, Treasury Secretary Scott Bessent has previously warned that any degree of instability in major sovereign bond markets can transmit into US funding costs and broader financial conditions.

In knock-on effect, Japan’s current position is thus seen as unusually sensitive with Tokyo sitting at the intersection of currency defence, wider bond market liquidity and also global rate setting.

A draft Japanese policy discussion in the past week reportedly framed the issue more bluntly, hinting that any meaningful use of reserves to defend the yen would necessarily imply sales of US Treasuries.

That framing by Tokyo, however sensible, cuts to the core of the constraint. Japan’s reserves are not just savings. They are a policy instrument that must be used when needed. But their most liquid and scalable component is also the most geopolitically and financially consequential asset on the global market.

Added to this is the US side of the equation which only adds another layer of tension given that Japan is not a marginal holder of Treasuries given its estimated $1.24 trillion portfolio – a portfolio large enough to mean that sustained selling would likely shift marginal pricing, particularly in off-peak liquidity conditions.

For now, Washington can count itself fortunate that there is no sign of a disorderly unwind on the part of the BoJ. Japanese interventions, when they occur, remain episodic and targeted – for now. But the direction of travel matters as reserve depletion of over $70bn in a single month is not routine. It is intervention at scale.

On the ground in Tokyo though, the yen’s structural weakness persists and US policy rates remain materially higher. Japanese monetary policy, despite its historic shift in 2024, is still anchored in the basement and while inflation dynamics in Tokyo have improved, it is not yet enough to fully close the gap.

That leaves Japan with limited tools at its disposal. It can intervene in currency markets. It can adjust policy slowly. Or it can continue to tolerate a weaker yen – an increasingly bitter pill for 125mn Japanese after three decades of acting as the US go-to when Treasuries need a home.

Each choice carries trade-offs and while selling Treasuries is the most direct intervention tool, and without doubt the most globally consequential – it is the most appropriate.

China

China’s behaviour also adds another element to the story. While Japan is using Treasuries as a liquidity source in moments of currency stress, China has been gradually reducing its exposure over time as covered before by IntelliNews. US Treasury holdings by China - reported in US TIC data - have drifted lower over recent years, reaching their lowest levels in more than a decade.

The composition of China’s overall reserves has also shifted. Gold purchases have increased, and diversification into non-US assets has continued through state-linked investment channels, particularly in Southeast Asia and Africa. The effect is not a sudden exit but a slow and calculated move away from US sovereign debt as the primary reserve anchor.

The motivations, although not stated publicly by Beijing likely differ from Japan’s. China’s moves are driven more by long-term strategic diversification and financial de-risking – and decoupling from all things US. Japan’s motivations meanwhile are driven by short-term currency stabilisation.

From the outside though, the combined effect is similar: incremental pressure on the foreign bid for US Treasuries.

That matters to the US and wider world economy because foreign official demand has long been a stabilising force in US debt markets. That force is now depleting and if both of the largest external holders in the form of Japan and China are either selling or intentionally reducing net purchases, the marginal buyer base becomes more dependent on private investors.

And where private buyers are involved, so too is the concept of price sensitivity and the demand for higher yields.

This brings the US Treasuries saga back to the loop. Japan sells Treasuries to defend the yen. As a result, US yields edge higher. The yen then weakens further. China, meanwhile, reduces its structural demand over time and US borrowing costs face pressure.

And while the US Federal Reserve is not directly involved, the consequences still feed back into global financial conditions.

Back in Japan, the dilemma is becoming sharper. Every intervention buys stability in the foreign exchange market but potentially tightens conditions in the bond market that ultimately set the price of that stability. The longer the divergence between US and Japanese rates persists, the more active the trade-offs become.

Japan’s actions are therefore not just a currency issue. They are a financing story for the United States which exposes an uncomfortable truth in the form of both sides being exposed to the same loop.

Japan cannot defend its currency without touching US debt markets. The US cannot ignore those flows without watching its own yields respond.

As such, the medicine and the poison are no longer separable.