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

The United States and Japan recently conducted a coordinated intervention in the currency market to support the Japanese Yen. Treasury Secretary Scott Bessent was noted with a handwritten memo indicating a plan to "Buy Japanese Yen (JPY) $5-10 bil," and Reuters later confirmed that the U.S. Treasury followed through on this by purchasing yen alongside Japanese authorities. This marks the first such joint intervention since the G7 action in 2011 after Japan's earthquake and tsunami, underscoring both countries' resolve to prevent a yen sell-off from creating global market instability.

A key aspect of this coordinated effort is Japan's use of the Federal Reserve's repurchase facility for dollar liquidity, rather than outright selling of U.S. Treasuries. This mechanism, introduced in 2020 to stabilize markets during the COVID-19 pandemic, allows Japan to acquire necessary U.S. dollars without divesting from its U.S. Treasury holdings. This approach is crucial because selling U.S. Treasuries could exert upward pressure on U.S. yields, a concern Washington is keen to avoid given already rising rates. The U.S. Treasury Secretary, Scott Bessent, indicated that the U.S. would consider increasing the size of this Fed facility in the coming months, calling it an "important backstop."

Analysts highlight that this joint action addresses the root cause of market stress rather than just treating symptoms. By reducing pressure on Japanese investors to sell Treasuries, demand for U.S. government debt remains more stable, preventing yields from climbing further. Japan may have already sold as much as $58.97 billion to buy yen in New York markets on July 30 prior to the confirmed joint intervention. Both the U.S. and Japan have expressed readiness for further joint intervention, with Bessent stating Washington "will not hesitate to participate in further joint intervention" and the Japanese Ministry of Finance reiterating its commitment to close communication and further action to counter "excessive volatility and disorderly movements in the Japanese yen."