Japan's foreign exchange reserves plunged by a record $79.6 billion in August to $1.208 trillion, the steepest monthly percentage decline on record, after Tokyo mounted ¥15.4 trillion ($98.7 billion) of dollar-selling, yen-buying operations to pull the currency back from near 40-year lows. The contraction was driven mainly by an $87.7 billion reduction in overseas securities, chiefly U.S. Treasuries, which Tokyo liquidated to fund the intervention. With reserve limits constraining further action, market-implied probability of a 0.25 percentage point Bank of Japan rate hike at its September meeting has reached 98%, according to money market data from Tokyo broker Tanshi, and BOJ board member Kazuyuki Masu said the central bank will continue raising policy rates to keep underlying inflation from exceeding 2%. Investors seeking exposure to the world's third-largest economy can choose among the iShares MSCI Japan ETF EWJ, with $23.34 billion in net assets and a 20.1% year-to-date gain; the WisdomTree Japan Hedged Equity ETF DXJ, with $7 billion in net assets and a 20.2% gain; the iShares MSCI Japan Small-Cap ETF SCJ, with $262.7 million in net assets and an 18.8% gain; and the WisdomTree Japan SmallCap Dividend ETF DFJ, with $450 million in net assets and an 18% gain.
Record FX intervention draining reserves plus 98% odds of a BOJ hike and Masu's pledge to keep raising rates push JGB yields higher.
Tokyo's massive yen-buying intervention and near-certain BOJ rate hike make the yen stronger versus the dollar.
