Fed’s $60 Billion Backstop Helps Japan Defend the Yen as Markets Test Its Limits

Key Takeaways

Japan has secured U.S. support in its effort to halt the yen’s decline, with the Federal Reserve’s Foreign and International Monetary Authorities repo facility providing an important liquidity buffer. However, Evercore ISI warns that the facility’s $60 billion daily limit may prove insufficient if currency traders challenge the willingness of Washington and Tokyo to continue intervening, potentially leaving Japan under pressure to sell U.S. Treasury securities.

Japan and the United States recently carried out a rare coordinated intervention in the foreign exchange market after the yen weakened to its lowest level against the dollar in almost 40 years.

The operation helped drive the dollar down from above 163 yen to around 155 before the Japanese currency surrendered part of its gains. Japanese Finance Minister Satsuki Katayama and U.S. Treasury Secretary Scott Bessent confirmed the intervention and signalled that further action remains possible if excessive currency volatility returns.

How the FIMA Repo Facility Supports Japan

A central part of the policy response is the Federal Reserve’s Foreign and International Monetary Authorities repo facility, commonly known as FIMA.

The program allows approved foreign central banks and international monetary institutions to temporarily exchange U.S. Treasury securities held at the Federal Reserve Bank of New York for dollars. The transaction is structured as a repurchase agreement, meaning the borrower pledges Treasuries as collateral and later repurchases them.

For Japan, the facility offers access to the dollars required for currency intervention without forcing authorities to sell large quantities of U.S. government debt directly into the market. Tokyo can borrow dollars against its Treasury portfolio and then sell those dollars to purchase yen.

The Federal Reserve introduced a temporary version of the program during the market disruption caused by the Covid-19 pandemic in 2020. It established the standing FIMA repo facility in July 2021 to provide an ongoing liquidity backstop for foreign official institutions and reduce the risk that dollar-funding stress could spill into U.S. financial markets.

The $60 Billion Limit Could Attract Market Scrutiny

Although FIMA gives Japan greater flexibility, Evercore ISI strategists Marco Casiraghi and Gang Lyu have highlighted a potentially significant weakness: each approved counterparty is limited to $60 billion of transactions per day.

That ceiling is only moderately larger than estimates for the latest intervention. The coordinated operation was reported to have involved approximately ¥8.45 trillion, or about $54 billion, although estimates of Japan’s direct contribution have varied.

The strategists warned that currency traders could focus on the cap and test how much financial and political support the United States and Japan are prepared to deploy. If defending the yen eventually requires an intervention significantly larger than $60 billion in a single day, FIMA may not be sufficient on its own.

Japan could still obtain dollars by selling Treasury securities, but that would create additional risks for the U.S. bond market. The possibility of such sales may therefore increase pressure on the Federal Reserve to expand the facility’s capacity.

Any change to the counterparty limit would require approval from the relevant Federal Reserve authorities. New Fed Chair Kevin Warsh could consequently face a decision over whether to increase the facility’s size if renewed yen weakness produces another large intervention.

Washington Wants to Avoid a Japanese Treasury Sell-Off

Supporting Japan’s use of FIMA also serves U.S. interests. Japan remains the largest foreign holder of U.S. government debt, with Treasury holdings of approximately $1.14 trillion as of May 2026.

A large-scale Japanese sale of Treasuries to finance currency intervention could push bond prices lower and long-term yields higher. That would potentially raise borrowing costs for American households, businesses and the federal government.

The risk is particularly important because the Treasury market is already contending with concerns about persistent inflation and the size of the U.S. fiscal deficit. Thirty-year Treasury yields have recently traded near multiyear highs, increasing the potential sensitivity of the market to sales by major overseas holders.

Bessent has described FIMA as an important backstop and expressed support for strengthening its capacity in the coming months. Using Treasuries as collateral instead of selling them outright could reduce the market impact of Japan’s intervention while still giving Tokyo access to the dollars it needs.

FIMA Is a Liquidity Tool, Not a Permanent Funding Source

FIMA was designed to provide temporary liquidity during periods of market stress rather than finance repeated or permanent currency intervention.

Transactions are generally conducted overnight, although maturities can be adjusted around weekends and holidays. The facility’s rate is linked to the Federal Reserve’s standing repo operation and is currently around 3.75%.

Because that rate is normally less attractive than financing available in the private repo market, foreign authorities have little incentive to use FIMA under ordinary conditions. The structure is intended to make the program a backstop rather than a routine source of low-cost dollar funding.

This means Japan could use the facility to manage short-term intervention needs, but it would be costly and operationally unsuitable as a long-term strategy for supporting the yen.

Interest-Rate Gap Remains the Yen’s Central Problem

The coordinated intervention carries greater weight than Japan’s previous unilateral efforts because Washington has openly supported a stronger yen. Nevertheless, intervention alone is unlikely to reverse the currency’s longer-term direction.

The underlying pressure comes largely from the difference between U.S. and Japanese interest rates. Higher U.S. yields encourage investors to borrow in low-yielding yen and invest in dollar-denominated assets through carry trades.

If the Federal Reserve keeps rates elevated while the Bank of Japan tightens policy only gradually, selling pressure on the yen may return after the immediate impact of the intervention fades. Investors who believe Japan cannot maintain its intervention campaign could rebuild short-yen positions and test the ¥160-to-¥164 region again.

Speculation is consequently growing that the Bank of Japan may raise interest rates sooner than previously expected. Markets had generally anticipated another increase before the end of the year, but persistent yen weakness, higher import costs and political pressure have increased the possibility of action as early as September.

An earlier rate increase could narrow the U.S.-Japan yield gap, improve the yen’s relative appeal and reinforce the message that Japanese authorities are prepared to defend currency stability. Without a meaningful shift in monetary policy, however, the Fed’s $60 billion FIMA facility may provide Japan with additional time rather than a lasting solution.