Japan's foreign reserves fell 6.18% in August to $1.207 trillion, the fastest monthly drop since records began in 2000, as Tokyo kept buying yen to defend the currency. The yen has since rallied to 155.83 per dollar, its strongest level in more than a month, with traders now betting on a Bank of Japan interest rate hike this month.
Reserves post record monthly decline
Japan's finance ministry data showed foreign reserves dropped to $1.207 trillion in August, down from $1.287 trillion in July. That marks the fourth straight monthly decline and surpassed the previous record set in May, when reserves fell 5.58%.
The ministry did not disclose a reason, but Kyodo News cited an unnamed official who said the drop reflected interventions to prop up the yen and a decline in the value of government bond holdings after a jump in yields. Masahiko Loo, senior fixed income strategist at State Street Investment Management, told CNBC the decline is primarily the result of Japan's recent dollar-selling, yen-buying FX interventions.
Record yen-buying this year
Tokyo has conducted multiple rounds of intervention this year, buying about 11.73 trillion yen ($75.26 billion) in April and May, then a larger 15.4 trillion yen operation at the end of July that was supplemented by the United States selling euros to support the yen. Combined, Japan has spent 27.1 trillion yen on intervention so far this year, the largest yearly total on record, surpassing the previous record of 20.4 trillion yen set in 2003. It was also the first coordinated intervention with Washington since 1998.
Separately, Japan's Finance Ministry data showed holdings of foreign securities fell by a record $87.8 billion at the end of August, close to the size of the latest intervention, with a ministry official again pointing to intervention as a factor. Tokyo said it spent the equivalent of 15.4 trillion yen, or about $98.6 billion, supporting the currency in the month through August 26, part of it jointly with the United States, making it the largest monthly intervention on record.
Yen extends rally as BOJ hike bets build
The yen has kept strengthening since. The USD/JPY pair fell 0.27% to 155.83, its strongest level in more than a month, after gaining 2.7% last week, its best weekly performance since July. That follows a stretch in which the yen hit a 40-year low of 163.98 on July 23 before recovering to 155.98 against the dollar.
Traders increasingly expect the Bank of Japan to raise its benchmark rate by 25 basis points on September 18 while leaving the door open to faster increases after that. Japan's top currency diplomat, Atsushi Mimura, said Friday he remained alert to exchange-rate movements and in constant contact with U.S. authorities, keeping the prospect of another yen-buying intervention in focus.
Asked whether the drop in reserves should worry investors, State Street's Loo said "the decline reflects policy action rather than financial stress."
Sources: CNBC, Investing.com
Trading involves risk.
Risk Disclaimer
