Japan’s Use of Fed Facility May Ease Pressure on Treasury Market

Japan and the United States undertook joint intervention to support the Japanese yen, with Japan reportedly selling as much as $58.97 billion to buy yen. A significant aspect of this intervention was Japan's use of the US Federal Reserve's repurchase facility to secure temporary US dollar liquidity. This facility, established in 2020 during the COVID-19 pandemic, allows Japan to acquire necessary dollars without having to sell off its substantial holdings of US Treasuries.

This approach is crucial because a direct sale of US Treasuries by Japan to fund its yen-buying intervention could trigger a sell-off in the US debt market. Such a sell-off would likely lead to an unwelcome spike in US Treasury yields, which serve as benchmarks for various long-term borrowing costs across the American economy, including mortgage rates, auto loans, and corporate borrowing expenses. US Treasury Secretary Scott Bessent had previously indicated that the US would consider increasing the size of this facility in coming months, highlighting its role as an "important backstop."

By leveraging the Fed's repurchase facility, Japan avoids exerting upward pressure on US Treasury yields, a concern shared by Washington. Analysts note that this coordinated action is driven by a mutual interest in preventing market instability, as both countries face risks of escalating inflation. The US Treasury Secretary Scott Bessent was even photographed with a note indicating a plan to "Buy Japanese Yen (JPY) $5-10 bil" ahead of the joint intervention, further underscoring US involvement and its broader objectives, which include stabilizing its own bond market.

Nobuyasu Atago, a former Bank of Japan official, commented that both the US and Japan see merits in cooperating due to the shared risks of inflation. This joint effort is the first such coordinated intervention since 2011, and Japan's finance ministry has stated that they will not hesitate to participate in further joint intervention, emphasizing their resolve to counter excessive volatility and disorderly movements in the yen.