Japan's record $94.6bn reserve drawdown converts old Treasuries into a yen profit line

The ministry's August 28 disclosure that it bought back 15.4 trillion yen of yen cash during the July 31 operation, selling foreign currency to do it ^[5], divides into the $94.6bn that left the reserves during August ^[1] at roughly 163 yen to the dollar ^[2], and the ministry's own translation of the Foreign Exchange Fund Special Account's 5.06 trillion yen fiscal-year profit into $31bn implies 163.2 ^[11][3]. Close enough that the month's drawdown reads as the settlement of that one operation rather than a scatter of smaller ones. Securities did 92.8 per cent of the work, $87.8bn of the $94.6bn ^[3][1], which is what an account holding mostly US Treasuries would look like on the way down.

This is a currency gain, not a bond gain. By Wolf Richter's account the ministry bought most of this paper between 2001 and 2011, when the yen was much stronger ^[6], with foreign securities peaking near $1.20tn in February 2012 ^[7], after which QE, zero and then negative rates, and years of deficits took the yen down 48 per cent even after the recent rally ^[8]. A dollar of Treasuries acquired before that decline converts back into about 1.9 times as many yen now ^[4]. Holdings stand at $840bn ^[3], so $360bn, 30 per cent of the peak, has already been turned into yen ^[5].

The plumbing is what makes it fiscal. Yen proceeds and foreign-currency yields go into the FEFSA, legally separate from the General Account ^[10]; the law retains 30 per cent as a loss buffer to be reinvested in reserves and moves 70 per cent across ^[12], which on a 5.06 trillion yen year means 1.52 trillion retained and 3.54 trillion transferred ^[7][13]. Prime Minister Takaichi wants that money for the food consumption tax, originally 8 per cent to zero, settled in August at 1 per cent for two years with benefits that take it to zero for low- and middle-income households ^[14], and the stated aim is to fund it without new bonds ^[15]. What the release does not show is the cost of that cut, so whether 3.54 trillion yen covers it is not a question these numbers answer.

This looks like a liquidation, not an income stream. The May-to-August drawdown of $174bn ^[2] is $43.5bn a month, and the $995bn left ^[1] is about 23 months of that ^[6], which is the honest ceiling on a defence funded by selling the cheap-cost-basis asset. Note also that the 1.52 trillion yen retained must go back into foreign exchange reserves ^[12], meaning part of the profit is spent re-acquiring dollars at today's rate rather than 2005's. That reading isn't locked in. The release gives a securities balance, not a sales log, and if a share of the $87.8bn is maturities not rolled rather than paper sold ^[3], the signal for Treasury buyers is far softer than the word dumping implies; and the 5.06 trillion yen figure excludes the May and July 31 gains entirely ^[11], so the profit on the biggest operation so far is asserted by Richter ^[9] and not yet booked in any number the ministry has published. Nothing about it is covert, either: reserves are disclosed monthly and the 15.4 trillion yen came from the ministry itself ^[5].