Bessent seeks bigger $60 billion Fed backstop for yen defense

Treasury Secretary Scott Bessent urged the Federal Reserve to expand its $60 billion FIMA Repo Facility, a pandemic-era backstop now funding Japan's defense of the yen after a rare coordinated intervention last week.

"The FIMA Repo Facility is an important backstop. We should encourage it to be upsized in the coming months," Bessent said in a social media posting on X, confirming Washington's active participation in Friday's yen-buying operation.

Japan held $1.14 trillion of Treasuries at the end of May, the most of any foreign nation and second only to the Fed itself. Foreign central banks have just under $3 trillion on deposit at the New York Fed, about $2.65 trillion of it in Treasuries. The facility lets countries borrow up to $60 billion for seven days at a premium above the open-market repo rate.

Expanding the facility would give Tokyo more firepower to halt the yen's slide to 40-year lows without selling Treasuries, which would push up bond yields that rose after the Fed held rates steady last week. Any change requires approval from the Federal Open Market Committee, which isn't scheduled to meet until mid-September.

The coordinated action, confirmed by Japan's finance ministry and President Donald Trump, sent the yen surging nearly 1 percent against the dollar when Asian trading resumed Monday. Bessent said the U.S. "will not hesitate to participate in further joint intervention," a direct warning to speculative short-sellers betting against the currency.

"We strongly support Japan's decisive market and monetary steps to correct the substantial undervaluation of the yen," Bessent said, adding that the Treasury remains "attentive and in close communication" with the Bank of Japan and Japan's Ministry of Finance.

The intervention places pressure on the Bank of Japan, which recently kept interest rates on hold. The joint action gives the central bank breathing room to consider near-term rate hikes without triggering a domestic economic shock.

A Backstop Built for 2020, Repurposed for 2026

The FIMA facility was created during the COVID-19 pandemic as a lender of last resort for international monetary authorities, allowing central banks to temporarily exchange Treasury securities for dollar liquidity during market stress. Its use to bankroll currency intervention is a purpose it was never designed for.

The last time the Fed expanded a crisis-era lending facility was during the 2020 dollar shortage, when swap lines with major central banks were reactivated to ease global dollar funding strains. That episode preceded a sharp rebound in risk assets as liquidity conditions normalized.

Meeting Bessent's call would add another task to new Fed Chairman Kevin Warsh's growing list, which includes reviews of the central bank's communications and balance sheet policies, combating persistent inflation, and dealing with growing dissent among policymakers as Trump calls for rate cuts. Warsh could convene inter-meeting conference calls, though these are typically reserved for financial crises.

Ripple Effects Across Emerging Markets

The aggressive defense of the yen carries implications beyond Japan. A strong dollar inflates the cost of dollar-denominated debt servicing and imported commodities for developing nations. If the Fed expands the FIMA backstop, it could ease the dollar-funding squeeze that routinely pressures African and other emerging-market central banks defending their currencies.

Bessent also praised Japanese Prime Minister Sanae Takaichi's government, saying it is "moving into an exciting new phase of Abenomics, as nearly 15 years of powerful stimulus have created durable, strong underlying economic dynamics." Abenomics refers to the policies launched by former Prime Minister Shinzo Abe in 2012 to end decades of deflation and stagnation.

As oil prices slump and the yen regains footing, the era of passive U.S. currency policy may be ending. By combining direct intervention with structural Fed facilities, the Treasury is showing a zero-tolerance approach to speculative currency destabilization.

This article is for informational purposes only and does not constitute investment advice.