Bessent Calls for Expanded Fed Facility to Help Japan Bolster Yen

U.S. Treasury Secretary Scott Bessent has called on the Federal Reserve to expand a facility that lends cash to official foreign accounts, which could add firepower to help Japan bolster its currency but may also unleash other risks.

The Foreign and International Monetary Authorities repo facility allows foreign authorities to access up to $60 billion in short-term funds in exchange for U.S. Treasuries as collateral, although it was never designed for this specific use.

Bessent's request came after a rare joint intervention with Japan's Ministry of Finance on Friday, where the two countries bought yen together. Bessent said that when FIMA was first launched six years ago, 'the size of the bond market was much smaller then, so I think it would be reasonable for the Fed to consider upsizing the facility.'

Upsizing the cap might allow Japan to fund yen purchases without having to sell any of its $1.14 trillion of Treasury holdings, which could benefit a U.S. government facing rising longer-term Treasury yields due to concerns about inflation and growing debt issuance.

However, some market watchers say upsizing FIMA may be more about Bessent trying to signal resolve on the currency intervention, rather than providing actual help to Japan. Evercore ISI analysts warned of possible market blowback, saying that 'the focus on a capped Fed repo facility could backfire by inviting markets to test the commitment of the U.S. and Japan to strengthen the yen if doing so requires large sales of U.S. Treasuries.'

Additionally, lifting the FIMA caps might also complicate another of Bessent's aims: a smaller Fed balance sheet, as big FIMA usage would add to Fed holdings at least on a temporary basis.