Japan has alternative tools to defend the yen without liquidating its more than $1.1 trillion US Treasury portfolio, according to Citigroup Inc.
Authorities can draw on the Federal Reserve’s Foreign and International Monetary Authorities Repo Facility, Citi strategists led by Jason Williams wrote in a note. The facility enables overseas central banks to use their Treasury holdings as collateral to access dollars, without selling the bonds to raise cash.
Japan could also tap its $160 billion in deposits at foreign central banks, most of which are likely held in a Fed facility, or use euro assets to buy yen, according to Citi.
“None of these deposits have ever been withdrawn, so we believe that this is a pure emergency fund only,” strategists led by Williams wrote. “Putting this together, we generally do not think there is a large risk to swap spreads, for now.”
US 30-year yields currently offer a 75 basis point premium over their risk-free counterparts, broadly unchanged from a month ago. If there was any indication that Japan might sell Treasuries, the premium would likely rise as it did after Liberation Day last year, when it hit 100 basis points.
Citi’s assessment comes as yen gains from the recent spate of currency interventions start to fade and investors assess the likelihood of further joint actions by the US and Japan, along with their funding mechanics. While confirming yen purchases on Friday, Japan’s Finance Minister Satsuki Katayama said in a statement that the nation would use the FIMA repo facility in the future.
Written by: Matthew Burges — With assistance from James Hirai @Bloomberg
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