Japan Likely Refrained from US Treasury Sales Amid Dollar Reserve Status

Japan probably did not offload its substantial holdings of US Treasury securities despite recent market volatility, according to Sayuri Shirai, a former Bank of Japan (BOJ) policymaker. She explained that with no viable alternative reserve asset available, Japan—and other major holders like China—remain committed to the US dollar given its entrenched status as the world’s primary reserve currency.

Highlights:

• Japan likely retained its US Treasury holdings amid market sell-offs in April.

• The US dollar’s position as the dominant reserve currency limits diversification options.

• China and Japan, as the largest US Treasury holders, remain key market watchers.

• No compelling alternative reserve assets available to replace US Treasuries.

Dollar’s Unrivaled Role Backed by Deep Capital Markets and Tech Leadership

Shirai emphasized that the dollar’s supremacy as a reserve currency is supported by the unparalleled depth of US capital markets and the country’s technological competitiveness. These factors combine to maintain global confidence in the dollar, despite periodic geopolitical tensions and US domestic policy uncertainties.

Highlights:

• US capital markets’ size and liquidity underpin the dollar’s dominance.

• Technological leadership of the US bolsters global trust in the currency.

• Japan sees no practical alternative to the dollar for reserve assets.

• Dollar dominance is considered unwavering despite periodic market shocks.

Euro Faces Challenges as a Reserve Currency Alternative

Despite recent suggestions by European Central Bank President Christine Lagarde that the euro could emerge as a viable alternative to the dollar, Shirai expressed skepticism. She cited Europe’s political fragmentation and relatively shallow capital markets as key impediments to the euro’s global reserve currency ambitions.

Highlights:

• Political fragmentation in Europe weakens euro’s appeal as a reserve currency.

• European capital markets lack the depth necessary to rival US markets.

• Euro’s 20% share of global reserves is well behind the dollar’s 58%.

• Euro unlikely to replace dollar dominance in the near term.

China’s Yuan Emerging as a Regional Competitor in Asia

Shirai identified China’s yuan as a more plausible contender to challenge the dollar’s dominance, especially within the Asian region. With increasing volumes of trade being denominated in yuan, China is steadily expanding its financial influence in Asia. However, the dollar is still expected to remain the primary currency in the region for the foreseeable future.

Highlights:

• Yuan gaining ground in Asian trade and financial transactions.

• China boosting its regional presence through increased yuan usage.

• Dollar remains dominant currency in Asia despite yuan’s rise.

• Yuan holds about 2% of global reserves, compared with the yen’s 5.8%.

Persistent Dollar Dominance Despite Gradual Decline in Reserve Share

Although the dollar’s share of global foreign exchange reserves has declined over decades—from higher levels to about 58% today—it remains the principal reserve currency by a wide margin. The euro, yuan, and yen trail significantly, reflecting the enduring structural advantages of the US dollar system.

Highlights:

• Dollar’s share of global reserves at 58%, lowest in decades but still dominant.

• Euro accounts for roughly 20% of reserves; yuan and yen at 2% and 5.8% respectively.

• Gradual diversification of reserves underway but dollar remains central.

• Structural and geopolitical factors support sustained dollar hegemony.

Japan Likely Retained US Treasuries Amid Dollar’s Reserve Currency Dominance

Japan, one of the largest holders of US Treasuries, likely avoided significant sales despite recent market volatility, as the dollar remains the unrivaled global reserve currency. Former BOJ policymaker Sayuri Shirai highlighted that alternatives like the euro lack the depth and political cohesion to challenge the dollar, while China’s yuan is gaining prominence regionally but remains a distant competitor globally. This continued confidence in the dollar supports US Treasury demand and stabilizes global bond markets.

Impact on Indian Stock Market:

• Stability in Global Bond Markets: Japan’s hold on US Treasuries helps ease pressure on global yields, supporting investor risk appetite in emerging markets, including India.

• Positive for Rupee Stability: Dollar demand sustained by Japan reduces extreme dollar volatility, aiding the Indian rupee’s stability.

• Boost to Exporters and Dollar-Denominated Assets: A stable dollar environment benefits Indian exporters and IT companies earning in dollars.

• Limited Impact on Domestic Equities: Indian equities may see indirect support due to steadier global financial conditions but no direct immediate effect.

Focus Points for Investors:

• Monitor global US Treasury demand as a proxy for dollar strength and risk sentiment.

• Watch for any shifts in yuan adoption in Asia, as it could gradually affect currency and trade dynamics.

• Stay alert to geopolitical and policy developments impacting the dollar’s global dominance.

• Consider currency risks in overseas investments, given the dollar’s continued dominance and the limited appeal of alternatives like the euro.

• Track RBI and government policies on forex reserves amid changing global currency trends.