The goal of this series has been to identify pressures on interest rates. Rates have moved up as expected, even as other forces, especially the details of the Fed announcement this week, took the limelight.

The following charts of Japan’s foreign exchange holdings come from a different source than the US government. The source is the Bank of Japan. Their site is a bit difficult to navigate but there are lots of data there. www.boj.or.jp
There are many tables under the Bank of Japan Statistics and other Key Statistics section. To confirm the work I’ve done in previous articles, I’ve developed some graphs showing the slowing in Japanese accumulation of all foreign exchange and gold holdings.

Japan was expanding its holdings of foreign exchange reserves and gold at an amazing pace up until the end of its fiscal year on March 31 2004. Since then they have stopped abruptly. This is important to US interest rates because the biggest portion of these holdings is in US Treasuries. Their purchases have, in the past, driven our rates lower.

Here are the latest views of Japanese holdings. First, the amount held by year. Notice the big jump in 2003 but little addition in 2004:

A look at the amount of addition to foreign exchange reserves each year emphasizes the big drop in buying in 2004.

The month by month detail of the last two years confirms how abrupt the policy change has been:

Looking at the most recent monthly data for changes in holdings gives us the most detailed view possible. On the chart below, I overlay the interest rate on the 10 Year Treasury, but with the scale upside-down so the correlation to the amount of increase in reserves can be compared to the low interest rate. There has been very little expansion of Japanese holdings this last year, but the US rate was not rising. Other forces kept the rate low, but in this last month, the rate has risen as the correlation might suggest.

There are lots of other factors involved, but the correlation here shows that Japanese buying is important enough to be a force on rates.

This week’s custody holdings do not contain dramatic changes but are updated below: