A Goldman Sachs research note examines the suggestion by US Treasury Secretary Scott Bessent that Japan make use of a Federal Reserve borrowing mechanism known as the Foreign and International Monetary Authorities (FIMA) repo facility. The facility, established by the Fed in March 2020 to provide foreign central banks with temporary dollar liquidity during market stress, enables those banks to lend their Treasury holdings for short periods rather than selling them outright — an arrangement designed to prevent major dislocations in the bond market and to avert political and economic complications for both countries if Treasury yields were to climb further.

Bessent referenced this approach in remarks last week:

"The facilities that the Fed has, whether it's the FIMA facility or the swap lines, the purpose is to protect the US economy and to keep any volatility offshore."

The question arises as to why Japan would need to rely on such a facility when intervening to defend the yen, given that the country holds one of the world's largest pools of foreign currency reserves. Japan is also the largest single foreign holder of US Treasuries, making any large-scale selling particularly consequential for the US bond market. On paper, Japan does possess substantial reserves — approximately $1.2 trillion. However, more than 80% of those reserves are held in securities, primarily US Treasuries and other foreign government bonds, rather than in liquid cash deposits.

As noted in analysis from May:

"Now, everyone knows that Tokyo has one of the biggest war chests in terms of foreign currency reserves. They have a whopping $1.2 trillion to work with. However, it is important to note that not all of this is in liquid cash deposits. In fact, over 80% of that are in securities which primarily consist of US Treasuries among other foreign government bonds."

"So, it is not to say that they have an 'unlimited' tap to keep drinking from if they burn out their cash reserves. If it were to come to that, selling Treasuries may have the unintended effect of pushing US yields higher and that is an indirect tailwind for the dollar instead. So, that sort of achieves the opposite effect of what Tokyo wants; that is for a lower USD/JPY."

In essence, intervention liquidity is not as abundant as it might appear, as Japan must find ways to convert bond holdings into cash. This dynamic presents a risk for the US bond market, where foreign official holders collectively account for a significant share of outstanding Treasury debt.

The Goldman Sachs note argues that while the FIMA facility may offer some relief, it primarily serves to smooth the process. Regardless, Japan will still need to sell Treasuries to fund its intervention operations.

"If the Treasury recognises that Japan would like to continue intervention to ensure credible yen strength and wants to prevent a destabilising force in the market, the FIMA facility can smooth the impact on the market. Crucially though, while using FIMA buys time, it does not prevent Japan's sales of US Treasuries. Eventually, the MOF will have to sell Treasuries and/or let enough securities roll off its balance sheet to fund the intervention."

"We do not see Bessent's request that the MOF intervene using FIMA as an attempt to prevent Japan or other reserve managers from selling Treasuries. It is primarily a way to smooth the potential impacts from large-scale FX intervention, which could have disruptive effects on the Treasury market."