FIMA Repo Facility could link Fed to Japan’s yen-support effort

The FIMA Repo Facility Japan yen debate is moving into focus after the U.S. and Japan acted to support the Japanese currency. The completed action was Treasury-led: the New York Fed reportedly sold euros for yen on the Treasury’s behalf. A separate proposal from Treasury Secretary Scott Bessent could require the Federal Reserve to decide whether to widen a dollar-liquidity tool for Japan.

That distinction matters for investors because Japan is a major holder of U.S. government debt. If Japanese authorities needed dollars to support the yen and instead sold Treasuries, those sales could push Treasury prices down and yields up. Higher Treasury yields can feed through to borrowing costs across the U.S. economy.

The Financial Times reported that the New York Fed conducted the euro-for-yen transactions for the Treasury on July 31, citing people familiar with the matter. CNBC reported that Treasury used euros from its Exchange Stabilization Fund to fund yen purchases. That operational role does not amount to an independent Fed decision on currency policy.

The coordinated effort followed a sharp decline in the yen. CNBC, citing FactSet data, said the dollar had approached 164 yen during the prior week, its highest level against the Japanese currency since 1986. Reuters reported that the joint effort followed months of discussions between U.S. and Japanese officials.

How could the FIMA Repo Facility support Japan’s yen?

FIMA, short for the Foreign and International Monetary Authorities Repo Facility, lets foreign central banks obtain short-term dollars by pledging U.S. Treasuries as collateral. In plain terms, it gives an overseas central bank a way to raise cash against its Treasuries without selling the bonds outright.

Bessent wants the facility expanded so Japan can access dollars while avoiding Treasury sales, CNBC reported. The Fed would need to agree to any expansion, and it has not done so. CNBC said the Fed declined to comment, while the Treasury did not respond to a request for comment about its plans.

Japan already has access to a Fed dollar swap line, CNBC reported, but it did not use that line in the latest intervention. A swap line allows Japan to exchange yen for dollars with the Fed. FIMA instead uses Treasury securities as the basis for short-term dollar funding.

The policy case is unsettled. Brad Setser, a former Treasury official now at the Council on Foreign Relations, wrote that central-bank swap arrangements are generally used to provide last-resort dollar funding, rather than to finance currency intervention, according to CNBC. The outlet also reported that it remains unclear whether the yen’s longer-term weakness represents the kind of global market-functioning problem that would normally justify wider Fed liquidity support.

The immediate yen operation was unusual. The Financial Times said it was the first outright joint U.S.-Japan yen-support purchase operation in nearly 30 years. But the next step, an expanded FIMA role, remains a proposal rather than an approved program.

This story draws on original reporting from CNBC.