Treasury Secretary Scott Bessent has urged the Federal Reserve to expand a little-known lending facility, the Foreign and International Monetary Authorities Repo Facility (FIMA), to help Japan defend the yen. This suggestion comes after the most notable coordinated currency intervention in decades, involving the US and Japan starting in late July.
FIMA allows Japan, the largest foreign holder of US Treasuries, to borrow dollars using its US government debt as collateral, then use those funds to buy yen. Bessent argues this mechanism could enable Japan to raise dollar liquidity without large-scale Treasury sales, which might disrupt the roughly $31 trillion Treasury market, increase volatility, lower bond prices, and complicate inflation control efforts.
What is FIMA? FIMA is a standing facility that lets foreign central banks borrow dollars by pledging US Treasuries held at the Federal Reserve Bank of New York. Each borrower can access up to $60 billion daily, slightly above the amount markets estimate Japan used on July 30 to support the yen. Loans are overnight, repayable within 24 hours, with interest at the top of the Fed's policy rate target, currently 3.50% to 3.75%. Borrowing via FIMA is costlier than private repo markets by design, serving as a backstop during stress, not a routine tool. The Fed launched FIMA in March 2020 during pandemic market turmoil and made it permanent in July 2021.
Is FIMA used often? No. It was last tapped in June, with a mere $1 million outstanding, and balances typically sit in the low millions. The most significant usage occurred in March 2023 during global banking turmoil, when authorities borrowed about $60 billion.
How does FIMA help the yen? Japan needs dollars to buy yen during intervention. Traditionally, it sells Treasuries for dollars, but large sales could pressure the bond market. FIMA offers an alternative: Japan can borrow dollars using Treasuries as collateral, avoiding direct sales and reducing market impact. Bessent called FIMA a key tool for yen stability, tweeting on August 2, "We encourage expanding the facility's size in coming months." Finance Minister Satsuki Katayama confirmed Japan's recent yen-buying intervention and said it will use FIMA, though neither side has confirmed if it has been activated. The Fed's weekly report, released Thursdays, will reveal usage.
What are the controversies? FIMA was designed for crisis periods, not routine intervention funding. Analysts worry its design and limits constrain support for repeated or large-scale yen defense. Evercore ISI strategists Marco Casiraghi and Gang Lyu argue that Bessent's call for higher FIMA caps could backfire, encouraging markets to test US-Japan resolve. Bank of America strategists Mark Cabana and Katie Craig note that using FIMA for yen support essentially grants Bessent a concession, providing Japan a funding channel to avoid Treasury sales, especially as markets are hypersensitive to overseas selling.
Has Bessent overstepped? Some Fed watchers say yes, noting it's rare for a Treasury secretary to publicly urge adjustments to Fed tools, particularly those under the FOMC's jurisdiction. As Treasury secretary, Bessent has influence but not control over the Fed. Any change to FIMA would require at least FOMC Foreign Exchange Subcommittee approval. However, others argue that during financial market volatility, Fed-Treasury coordination is not unusual. Given recent US Treasury market volatility, helping reduce intervention's impact on bonds is plausible.
Does Japan have alternatives? RBC Capital Markets rates strategist Blake Gwinn says Japan has multiple options: reinvesting interest income from dollar assets, letting Treasuries mature without reinvesting, or directly selling bonds. Cash can be placed in the Fed's foreign RRP pool, a reverse repo facility for overnight deposits, currently yielding about 3.5%. Bank of America estimates Japan's Finance Ministry holds about $162 billion in deposits, mostly in that pool, providing ample intervention funds without new borrowing. Allowing short-term Treasury bills to roll off naturally is also realistic, as Japan holds large amounts of bills maturing on fixed Tuesday and Thursday cycles, generating steady cash flows without selling longer-term bonds or borrowing. Market participants believe this has already been a key funding source for Japan's recent yen support.
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