Foreign Exchange Intervention as a Shield for the Treasury Market?

• Japan and the US jointly purchased yen after the Japanese currency had fallen to its lowest level since 1986.
• The US is also likely to be pursuing its own interests: further sales of US Treasuries by Japan could push already elevated US interest rates even higher.
• The FIMA Repo Facility can temporarily provide Japan with US dollars without requiring it to sell US Treasuries. However, it merely buys time and does not resolve the underlying problems.

At the end of July, the US and Japan purchased yen as part of a coordinated foreign exchange intervention. The move was prompted by the pronounced weakness of the Japanese currency: in July, the exchange rate had risen above 163 yen per US dollar, leaving the yen at its lowest level since 1986. Japan’s Ministry of Finance confirmed the joint operation in early August but did not disclose an official amount. Estimates put the total volume at up to USD 95 billion, with the US contribution of USD 5 billion to USD 10 billion likely accounting for only a small proportion.

Foreign exchange interventions using official reserves are not unusual in themselves. Nevertheless, the joint operation is noteworthy for two reasons. First, the US participated directly – a rare move for Washington. The last time the US took part in a coordinated intervention was in 2011, although on that occasion the aim was to counter an excessive appreciation of the yen. Second, US Treasury Secretary Scott Bessent performed a rhetorical U-turn, shifting from “Absolutely not” in January to “Whatever it takes” in August. The change did not come entirely out of the blue: a bilateral agreement concluded in September 2025 had already established a framework for interventions to counter excessive exchange rate movements. This raises the question of what interests of its own the US associates with the currency intervention.
 

Japan’s Reserves and the Treasury Market

There are several indications that the operation pursued two objectives simultaneously: stabilising the yen and limiting additional pressure on the US Treasury market. The background is Japan’s role as the largest foreign creditor of the United States. At the end of May, Japanese public- and private-sector investors held around USD 1.143 trillion in US Treasuries. The joint intervention had been preceded by several unilateral attempts by Japan’s Ministry of Finance to support the yen earlier this year. In April and May, Tokyo purchased yen worth JPY 11.7 trillion, equivalent to approximately USD 77 billion. A look at Japan’s foreign exchange reserves suggests that substantial securities holdings – including US Treasuries – were sold to finance these operations.

For the US, these interventions came at an inopportune time. High government debt, rising refinancing requirements and an uncertain inflation outlook have driven yields at the long end of the curve markedly higher in recent months. On 31 July, the yield on 30-year US Treasuries reached 5.27%, its highest level since 2007. Additional sales from Japan’s reserve holdings could have further intensified supply pressure in this environment.

The FIMA Facility as a Link

Against this backdrop, the official explanations given by the US administration for the intervention – rising inflation in Japan, the risk of competitive devaluations in Asia and global financial stability – are likely to account for only part of the US rationale. This impression is reinforced by Treasury Secretary Bessent himself: he made further support conditional on benefits for the US economy while simultaneously calling for the use and expansion of the FIMA Repo Facility.

This suggests that, alongside stabilising the yen, Washington is also considering potential repercussions for the US Treasury market. The US contribution of USD 5 billion to USD 10 billion may appear small. However, the value of US participation lies less in its financial firepower than in the signal of cooperation – and in providing an infrastructure that allows Japan to intervene without having to sell Treasuries.

Through the FIMA Repo Facility, eligible foreign monetary authorities can temporarily exchange US Treasuries held in custody at the Federal Reserve for US dollars without first having to sell them in the market. These dollars can then be exchanged for yen, for example, in the foreign exchange market. When the facility is used in this way, the liquidity requirement is temporarily shifted from the cash market to the Federal Reserve’s balance sheet, thereby limiting additional selling pressure on US Treasuries, at least for a time.

However, the latest weekly data indicate that the FIMA facility has not yet been visibly used during the current episode. Even after the coordinated intervention at the end of July, outstanding repo transactions by foreign monetary authorities with the Federal Reserve remained at zero. Its current significance therefore lies primarily in its role as a liquidity backstop.