Japan's $5500 Billion Investment Fund May Weaken Dollar, Strengthen Yen

Japan's planned investment fund, valued at 5500 billion dollars, could significantly rely on the country's 13000 billion dollars in foreign exchange reserves. A key component of these reserves is U.S. Treasury bonds, with an estimated duration of 3-5 years. If Japan finances this long-term investment fund by selling short-term U.S. bonds, it could drive up U.S. long-term bond yields, potentially weakening the dollar and strengthening the yen.

Citibank analysts suggest that the 5500 billion dollars investment fund, as part of the U.S.-Japan trade agreement, could lead to a form of bilateral "mini Camp David Accord," further weakening the dollar and strengthening the yen. On September 12, Citibank analysts released a report indicating that the source of the 5500 billion dollars planned for investment in the U.S. could heavily depend on Japan's 13000 billion dollars in foreign exchange reserves. The report noted that while a major shift in multilateral monetary policy akin to the Camp David Accord is not expected, a bilateral "mini Camp David Accord" is possible.

Japan's holdings of U.S. Treasury bonds are a crucial part of its foreign exchange reserves, with an estimated duration of 3-5 years. However, the investment fund established under the trade agreement is expected to invest in U.S. assets with maturities of 10-20 years. If Japan finances this long-term investment fund by selling short-term U.S. bonds, it could push up U.S. long-term bond yields. To stabilize the market, the U.S. might pressure Japan to extend the duration of its held U.S. bonds when managing its foreign exchange reserves. This high-level bilateral coordination to address potential market volatility is the basis for what Citibank refers to as a "mini Camp David Accord." Citibank analysts emphasize that from a monetary policy perspective, there is a sustained trend towards a weaker dollar and a stronger yen.

This expectation contrasts sharply with the recent weakness of the yen. Political uncertainty and tariff issues have cast a shadow over the Bank of Japan's interest rate hike path, making the yen the worst-performing major currency over the past three months.