Investment Banks: Japan's Use of Federal Reserve Tools May Test Yen's Determination

Evercore ISI stated that a rarely used Federal Reserve liquidity tool could potentially prevent Japan from selling U.S. Treasuries to support the yen, but long-term reliance on this tool might encourage the market to test the resolve of both the U.S. and Japan. The "Foreign and International Monetary Authorities Repo Facility" allows overseas institutions to use their holdings of U.S. Treasuries as collateral to obtain dollars, thus avoiding the need to sell bonds in the open market to raise cash. This tool was established during the COVID-19 pandemic in 2020, aimed at allowing counterparties to access liquidity without significantly disrupting the Treasury market, and was subsequently made a permanent tool in July 2021.