Evercore ISI suggests that a rarely used Federal Reserve liquidity facility might help Japan avoid selling US Treasuries to bolster the yen, but prolonged reliance on it could instead encourage markets to test the determination of both the US and Japan to support the currency.

The Foreign and International Monetary Authorities (FIMA) repo facility allows overseas institutions to obtain US dollars by using their holdings of US Treasuries as collateral, without needing to sell the bonds in the open market to raise cash. Established during the pandemic in 2020 to allow counterparties to access liquidity while minimizing disruptions to the US Treasury market, it was made permanent in July 2021.

However, the facility has limitations, with a daily usage cap of $60 billion per counterparty. Evercore ISI strategists Marco Casiraghi and Gang Lyu noted that this is only slightly higher than the estimated amount Japan used for a single day of currency intervention last Thursday. In a report to clients on Monday, the strategists wrote that this restricts the tool's effectiveness in sustained intervention and raises questions about US willingness to support repeated and large-scale FX interventions.

"We believe focusing on this capped Fed repo facility could be counterproductive, tempting markets to test the resolve of both the US and Japan when large-scale selling of US Treasuries is needed to support the yen," they stated.

The central bank facility is typically underutilized. According to the latest Fed data, the average balance for the week ending July 29 was about $6 million. The last notable usage was in early February, with a balance of $3 billion.

Japanese Finance Minister Shunichi Suzuki confirmed that Japan bought yen on Friday and intends to use the facility in the future. US Treasury Secretary Scott Bessent expressed support for the move in a social media post and indicated he would advocate for expanding the facility's size. Any adjustments could be approved by the Foreign Exchange Committee under the Federal Open Market Committee (FOMC), which would need to inform the entire FOMC of any planned changes.

Evercore ISI strategists said the facility is designed as a short-term liquidity backstop, not a long-term funding source, so any borrowing must be rolled over to continue. Additionally, they noted the cost is "relatively high," with the facility's rate at 3.75%, compared to seven-day funding costs of the one-week overnight index swap (OIS) rate plus 25 basis points. The strategists stated that the Fed deliberately set the facility's rate above market repo financing costs, indicating it is intended for market stress periods rather than daily funding or sustained FX intervention.