Japan’s Foreign Exchange Intervention “Drains Liquidity”? Overseas Holdings of US Treasuries in July Fall to Nine-Month Low, China’s Holdings Hit Lowest Level Since 2008

Official U.S. data shows that in July of this year, the scale of U.S. Treasury holdings by overseas investors fell to a nine-month low, coinciding with intervention by Japan, America’s largest foreign “creditor,” in the foreign exchange market to support the yen.

According to the U.S. Treasury Department’s International Capital Flows report (TIC) released on Wednesday, September 16 (EST), overseas investors’ holdings of U.S. Treasuries declined for the second consecutive month in July, shrinking by $50.4 billion from June to $9.25 trillion—the lowest level since October 2025.

The TIC report shows that the decline in holdings by France and Canada was the main driver behind the drop in foreign U.S. Treasuries in July. Japan and Mainland China also continued to reduce their holdings. Meanwhile, at the end of July, Japan coordinated with the U.S. to intervene in the foreign exchange market and buy yen, raising market concerns once again: whether Japan’s use of foreign reserves to support its currency will further affect its allocation of U.S. Treasuries and bring additional pressure to the U.S. Treasury market.

Japan’s U.S. Treasury Holdings Fall for Three Months Straight, Hitting Another Yearly Low

The TIC report states that Japan’s holdings of U.S. Treasuries in July fell by $12.8 billion month-on-month, down to $1.1039 trillion, marking the lowest since January 2025 for the second consecutive month, though its total holdings still rank first among foreign countries and regions. By the end of July, Japan’s U.S. Treasury holdings had declined for three consecutive months.

Japan is the largest foreign holder of U.S. Treasuries, and the connection between its foreign reserve allocation and the U.S. Treasury market has always drawn market attention. In recent months, Japan’s reduction in U.S. Treasuries has coincided over time with its foreign exchange market interventions.

Data released by Japan’s Ministry of Finance on May 29 showed that between April 28 and May 27, Japan’s total foreign exchange market intervention reached 11.73 trillion yen. Analysts believe that such yen purchases likely involved the sale of a significant amount of U.S. Treasuries.

On August 3, Japan’s Ministry of Finance confirmed that the Japanese government and the U.S. Treasury Department coordinated foreign exchange intervention to buy yen on July 31 to curb recent sharp fluctuations in the yen’s exchange rate. This was the first coordinated currency intervention between Japan and the U.S. since the Great East Japan Earthquake in 2011 and is exceptionally rare except in extraordinary periods such as financial crises.

Data released by Japan’s Ministry of Finance on August 29 showed that between July 30 and August 26, the Japanese government invested about 15.4 trillion yen in foreign exchange market intervention, setting a new record high for intervention amounts.

Intervening in the foreign exchange market requires Japan to sell foreign currencies and buy yen. As Japan holds a large amount of U.S. Treasuries in its foreign reserves, the market is closely watching whether Japan might finance intervention by selling U.S. Treasuries and other dollar assets.

However, it should be noted that the TIC report reflects changes in balance, which includes both actual trading and changes in bond valuations. Therefore, the report cannot by itself confirm exactly how much U.S. Treasuries Japan sold for its interventions.

China Also Reduces Holdings, While U.K. Increases by $58.4 Billion to a New High

According to the TIC report, besides Japan, China—another major American “creditor”—also continued to reduce its holdings in July.

Mainland China’s holdings of U.S. Treasuries in July fell by $15.4 billion month-on-month to $618 billion, the lowest level since 2008—a new 18-year low. Holdings fell for the second consecutive month and declined for the ninth time in the past eleven months, remaining the third-largest foreign holder overall.

The U.S.’s second-largest overseas “creditor”, the United Kingdom, moved in the opposite direction. The U.K.’s holdings increased by $58.4 billion in July to $998.3 billion, breaking the all-time high set in May. Since surpassing China for the first time in over two decades in March 2025, the U.K. has maintained its position as the second-largest holder of U.S. Treasuries, with holdings rebounding in July after dropping in June, and posting gains in six of the past seven months.

Among the top ten foreign holders of U.S. Treasuries in the TIC report, only the U.K., Luxembourg, and the Cayman Islands increased their holdings in July. The U.K.’s increase was the largest; Luxembourg and the Cayman Islands rose by $7.9 billion and $7.0 billion, respectively. France and Canada, which rank ninth and seventh in total holdings, recorded the largest decreases, reducing their holdings by $41.5 billion and $33.3 billion, respectively.

Belgium, ranked fourth in total holdings, reduced its holdings by $11.8 billion in July to $470.7 billion. Market analysts noted that Belgium’s holdings may include custody accounts for countries like China, so its fluctuations should not be simply regarded as purely Belgian investors’ transactions.

Overall, the drop in foreign U.S. Treasury holdings in July was not caused by Japan alone. Declines in holdings by France, Canada, and others, as well as bond price movements, all contributed to the total change in scale.

Foreign U.S. Treasury Holdings Continue to Decline, Market Still Focused on Inflation and Fiscal Deficit

From a broader perspective, foreign investment in U.S. Treasuries has retreated from its highs earlier this year.

The U.S. Treasury Department’s June TIC report previously showed that foreign holders of U.S. Treasuries reduced their positions by $72.1 billion month-on-month to about $9.3 trillion—the largest single-month drop since March. Overseas holdings in May reached about $9.37 trillion, just below the record high of $9.49 trillion set in February.

In July, foreign holdings fell by another $50.4 billion to $9.25 trillion, further distancing from the highs at the start of the year.

Bloomberg pointed out that in July, the Bloomberg U.S. Treasury Index fell by over 1%. At the time, investors worried that the Iran war would aggravate inflation risk, while U.S. fiscal deficit issues remained in focus.

The decline in foreign holdings may indicate pressure on demand for U.S. Treasuries, but the balance does not directly reflect net selling activity. Especially when bond prices fall, investors’ market values can decline without significant selling.

For the U.S. Treasury market, potential asset sales caused by Japan’s foreign exchange interventions, combined with the U.S. fiscal deficit, inflation risks, and shifting foreign demand, are all intertwined. Going forward, it will be important to watch not only whether Japan continues to reduce its U.S. Treasuries holdings, but also how it finances future interventions and whether other major foreign holders continue to adjust their allocations.