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US bonds are preparing for the impact of Japanese currency movements

Japan’s yen-buying intervention in the currency market may not yet be causing tremors in the US bond market, but that calm could be shattered if Tokyo becomes embroiled in a protracted battle to prevent the exchange rate from weakening much further.

Central banks that want to prevent their currencies from depreciating too much or too quickly essentially intervene by selling dollar-denominated assets from their international reserves and using the proceeds to buy back their own currencies.

Experts assume that the Bank of Japan’s purchases of yen on behalf of the Ministry of Finance are financed by dollar deposits from the BOJ, which are later replenished by the sale of very short-term US government bonds or even banknotes.

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