A seldom-utilized Federal Reserve liquidity facility may impede Japan's ability to sell Treasuries to bolster the yen. Evercore ISI suggests that if this tool is employed for an extended period, markets might challenge the resolve of both the US and Japan.

The facility in question is the Standing Repo Facility (SRF). Introduced in 2021, it allows primary dealers to borrow cash from the Fed against Treasury collateral. While designed to ensure market stability, its use by foreign entities like Japan, for the purpose of currency intervention, is unprecedented.

Japan has historically sold US Treasuries to acquire dollars, which it then sells in the foreign exchange market to strengthen the yen. However, if Japan needs to raise dollars quickly, it might turn to the SRF. This would involve swapping Treasuries for dollars, rather than selling them outright. The concern is that this indirect method could be perceived as a sign of desperation or strain, potentially emboldening speculators to test the yen's resilience and the commitment of both nations to currency stability.