Fed Facility Could Give Japan More Ammo in Currency Battle
The US Federal Reserve's Foreign and International Monetary Authorities repo facility (FIMA) has been brought into focus as Japan continues to defend its currency.
J.P. Morgan notes that FIMA could provide a boost to Japan's ability to intervene in the foreign exchange market by supplying temporary dollars without forcing Tokyo to sell Treasuries, which could put upward pressure on US yields.
The facility allows Japan to pledge US Treasuries to the Fed and borrow dollars against them, rather than selling those Treasuries outright. This matters because repeated Japanese selling of Treasuries could have unwanted consequences for Washington.
J.P. Morgan warns that FIMA was not designed for FX intervention and there are constraints to its scalability and efficacy if deployed for that purpose.