Let proceed in order in a logic fashion which would have made Lewis Carroll proud (he was a mathematician and logician). Elimination is part of the logician Arsenal.
A QT rarely fails to make a currency stronger (the US did QT post civil war and the fiat USD of the civil war shot to the moon (it came back to convertibility in 1879);.
So is the BoJ doing some sort of QT?
No the BOJ is not selling UST to cancel M0.
Why?
Because it does not hold much UST in the first place.
If you look at the Bank of Japan’s own balance sheet, you will see a line item called "Foreign Currency Assets." However, this amount is relatively small (typically only a few tens of billions of dollars).
The entity owning the US Treasuries (UST) sold during a yen-buying intervention are held almost entirely on the Ministry of Finance's (MoF) balance sheet, specifically inside the Foreign Exchange Fund Special Account (FEFSA). They are not held on the Bank of Japan’s (BoJ) balance sheet.
So the BoJ is not selling the assets it does not have. 🐰 We just won a special Lewis Carroll here.
So who is selling those UST in Japan?
So the MoF sells UST to obtain US dollars (USD) in global UST markets, a UST is a USD denominated asset, they just get USD which have no duration.
When a foreign monetary authority like Japan's Ministry of Finance (MoF) sells US Treasuries (USTs) to market participants (such as hedge funds executing basis or carry trades), the resulting USD proceeds are deposited directly back into the MoF's official cash account at the Federal Reserve Bank of New York (FRBNY).
The Custody Debit: The Federal Reserve debits the UST securities from the MoF’s Foreign und International Account custody ledger.
The Settlement Clearing: The purchasing hedge fund pays for the USTs using USD financed via the repo market or its clearing prime broker. This USD moves through the Fedwire Funds Service.
The Fed Account Credit: The incoming cash is credited immediately to the MoF's Foreign Official Cash Account maintained at the FRBNY.
So once the USD cash held by the MoF at the FRBNY, it is then transferred to a commercial Japanese commercial bank.
From an accounting standpoint, the total volume of USD assets held by the aggregated Japanese official sector and banking system (MoF + BoJ + Japanese Commercial Banks) remains exactly unchanged by that transaction.
To see exactly why the total amount of USD is unchanged, we can trace the exact debit and credit entry for the FX transaction:
The Consolidated Ledger View
To see exactly why the total amount of USD is unchanged, we can trace the exact debit and credit entry for the FX transaction:
- Before the transfer: The MoF holds the USD cash at the FRBNY. The Japanese commercial bank holds Yen.
- The transfer: The MoF hands the USD cash over to the Japanese commercial bank's account at the Fed (or its US correspondent clearing bank). In return, the commercial bank hands Japanese Yen to the MoF in Tokyo.
- After the transfer: The MoF's USD balance goes to zero. The Japanese commercial bank's USD balance increases by that exact same amount.
When you draw a consolidated boundary line around (MoF + BoJ + Japanese Commercial Banks), the USD cash simply moved from the left pocket (the sovereign) to the right pocket (the commercial banking sector).
There is in fact a temporary reserve drain from the Banks on M0 at the BoJ but those are coming back fast as the MoF repays some Japanese bonds holders liabilities with this JPY M0 yen that are then redeposited into Commercial banks and go right back as M0 into the BoJ.
The Hiccup in JPY / USD explained
There is an initial, temporary drain on bank reserves (M₀) at the Bank of Japan as the Commercial banks send Yen to the MoF for the USD they received from the same MoF, but it is a short-lived liquidity mismatch because the MoF quickly redistributes that Yen back into the commercial banking system through the bond holders.
THE CLOSED M0 YEN LOOP
Step 1: [Commercial Banks] ─── M0 ───► [MoF Account @ BoJ] (Drain)
Step 2: [MoF Account @ BoJ] ─── M0 ───► [JGB Bondholders] (Spend)
Step 3: [JGB Bondholders] ─── M0 ───► [Commercial Banks] (Deposit)
Step 4: [Commercial Banks] ─── M0 ───► [BoJ Current Account] (Refill)
The hiccup in FX happens just during that process.
Because financial plumbing does not settle instantaneously across different jurisdictions and time zones, that brief gap between the MoF draining the reserves and refilling them creates a structural choke point.
And what the markets take of a “failed intervention” because the FX comes right back is simply a temporary mismatch.
In the next posts we will probably explain the impact of this temporary hiccup, after that the impact of the cost of swap funding for Japanese Banks, and what it means for liquidity to convert UST into commercial banks assets.
The failed intervention narrative is a complete illusion. But, just like the Mad Hatter, the March Hare, and the Dormouse celebrate their unbirthdays, let’s celebrate the Japanese Non-Intervention in the Yen.