Japan probably sold some overseas securities, including US Treasuries, over the past month to fund its record yen-buying intervention, even as American officials grow increasingly wary of the impact such sales could have on long-term yields.

Data from Japan's Ministry of Finance on Monday showed overseas securities holdings tumbled by $87.8 billion at the end of August, the largest monthly drop on record. That reduction is roughly in line with the scale of intervention Tokyo recently deployed to prop up the yen.

Analysts believe the sales were concentrated in shorter-dated US debt. The ministry confirmed that authorities spent ¥15.4 trillion ($98.6 billion) on intervention in the month through August 26, with some operations conducted jointly with the US. That monthly figure also set a new record.

A briefing official at the ministry said currency intervention was one reason for the decline in reserves but didn't confirm whether Japan had sold US Treasuries. If Tokyo again resorts to selling Treasuries to fund intervention, it would signal a willingness to accept friction with Washington, where officials including Treasury Secretary Scott Bessent are focused on market stability, especially with US midterm elections approaching.

"Japan may have used both overseas securities and foreign deposits, but the most likely move is selling US Treasuries," said Jun Takada, chief economist at Itochu Research Institute. On July 31, the US joined Japan in coordinated intervention, the first time the two nations acted together to support the yen since 1998, indicating broadly aligned positions at this stage.

Takada added, "Bessent has also said on multiple occasions that the yen's decline was excessive, so the US likely shares that view, which is why Washington chose to cooperate with Tokyo." Still, longer-term US yields remain a key focus for Bessent, who recently announced the government would double the size of its long-dated bond buyback program over the next two months until November 4, an effort aimed at capping upward pressure on yields.

Official data doesn't provide a detailed breakdown of securities holdings by maturity, but market participants estimate roughly 70% of Japan's reserves are in US Treasuries. "Japan holds ample securities to continue intervening, but given Bessent's stance, further Treasury sales could draw US pressure, which would constrain the finance ministry and the Bank of Japan's next steps," said Akari Nishimura, an economist at Japan Research Institute.

Analysts say the likely targets of any sales would be short-term bills to minimize the impact on long-term yields and reduce the risk of angering Washington. "Japan's Treasury holdings span the full yield curve, but the first choice for raising intervention funds would be liquidating assets within five years, which are more liquid," said Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities. "Given the potential pressure on longer-dated yields, the ministry probably wouldn't sell 10-year or longer bonds."

Gareth Berry, a Singapore-based strategist at Macquarie Group, noted that short-dated Treasuries are not only the easiest to sell but also where reserve managers naturally prefer to invest, calling it the "sweet spot" for reserve allocation. "Conveniently, selling short-dated Treasuries likely wouldn't trigger much concern from the US, and Washington would find it more acceptable since attention is focused on the long end," Berry said.

Market sentiment has been tense since last week as investors repriced rate expectations and positions. The yen strengthened from 160.39 per dollar on Wednesday to as firm as 155.30 on Friday, and was around 155.96 on Monday afternoon Tokyo time. The currency's movement suggests Japan hasn't intervened further since then.

Following Bessent's call last week in North Carolina for Japan to hike rates, combined with recent signals from BOJ officials, the market now fully prices a September rate increase. Some investors even think the BOJ could accelerate tightening after a series of hawkish remarks, which would further support the yen.

Monday's data showed Japan's total reserves fell by $94.6 billion to $995 billion at the end of August, though the stockpile remains substantial, giving authorities ample resources to intervene again if needed. Another funding source for intervention, foreign currency deposits, dropped by $6.9 billion.

Finance Minister Katsunobu Kato said after the joint intervention that future operations could also use the Foreign and International Monetary Authorities (FIMA) repo facility, created during the pandemic, which allows Japan to access up to $60 billion per day without selling Treasuries, reducing the impact on US yields while expanding intervention options. However, Japan hasn't yet used the FIMA facility. "No precedent of actual use is a major practical hurdle," Nishimura said. "So I think mentioning FIMA is more about signaling that Japan has ample intervention funds, rather than an intention to actually use it."