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Nicholas Spiro

Before the unexpected intervention in Japan’s foreign exchange market by the US Treasury Department on July 31 – the first time both countries joined forces to support the yen via outright purchases since 1998 – the probability of the Bank of Japan raising interest rates at its policy meeting on September 17-18 was less than 30 per cent.
Fast forward to today, and the chances of an increase have shot up to almost 100 per cent. In fact, expectations have shifted so dramatically that bond markets are pricing in a one percentage point rise in borrowing costs to 2 per cent by the third quarter of 2027. JPMorgan is even more hawkish and expects Japanese interest rates to rise to 2.25 per cent by the end of next year.
While several factors are at play, the most important one is the unprecedented pressure exerted by US Treasury Secretary Scott Bessent on Japanese policymakers to take more forceful action to strengthen the yen.
The coordinated intervention to support Japan’s currency, which had fallen to its weakest level against the dollar since 1986, has fuelled speculation about the terms of the cooperation, particularly given Bessent’s active interest in Japan’s economic affairs, which dates back to his years as a hedge fund manager.
In a report on August 13, Citigroup said that “it makes sense to interpret concerted intervention as suggesting US authorities have received a convincing pledge regarding an adjustment in the direction of the Takaichi government’s economic policy. One aspect of this is likely promotion of BOJ monetary policy normalisation.”
Even if such assurances were made, it would be politically unwise for Bessent to play up the fact that he was able to extract them. Although investors’ perception that the BOJ is under pressure to raise interest rates more aggressively to prop up the yen has caused the currency to strengthen 4.6 per cent versus the dollar since July 28, Bessent has overplayed his hand.

Last week, he warned traders not to bet against the yen, claiming he has “asymmetric information” that gives him “pretty good insight into … what Japanese policymakers are going to do”. He even boasted: “I am the house now. You can bet against me if you want.”
Never mind that Bessent’s credibility in the bond markets has already suffered – his intervention to bring down long-term US bond yields failed to prevent the 10-year yield from breaching 5 per cent earlier this week – and that the resumption of hostilities in the Middle East makes the policy dilemmas facing the world’s central banks more acute.
The overt pressure exerted by the US Treasury Secretary on Japan, especially his blunt tone, is bound to backfire. While Japanese policymakers have, for the most part, refrained from commenting publicly on Bessent’s intervention, Finance Minister Satsuki Katayama said his reference to himself as “the house” was “a bit scary”.
If the Trump administration tried to meddle in Chinese policymaking in such a brazen manner, there would be hell to pay. Although Japan is a close ally of the United States, the flagrant foreign interference in the domestic economic affairs of a leading economy – one whose policies have a major bearing on global financial stability – beggars belief.
Bessent’s intervention could have adverse implications for Japan’s economy, the BOJ’s credibility and technology-driven stock markets in Asia. First, while borrowing costs need to rise – real interest rates are still negative, Japan’s corporate sector has proved extremely resilient and wage growth is picking up – household consumption was flat in the second quarter.

Although Bessent believes Japan has overcome decades of deflation, Japanese policymakers are not so sure. Prime Minister Sanae Takaichi was already worried about the risk of excessive tightening before Bessent’s intervention. Her fears are certain to have intensified since the escalation of the US Treasury’s pressure campaign.
Second, the perception that the BOJ is stepping up the pace of interest rate increases as a quid pro quo for US support in propping up the yen could severely undermine the Japanese central bank’s credibility. It is bad enough that the politicisation of US monetary policy contributed to the Federal Reserve’s decision on September 16 to raise interest rates in order to maintain credibility. By jeopardising the independence of the BOJ, Bessent is playing with fire.
Third, if higher interest rates in Japan cause the yen carry trade – a widely-used strategy in markets whereby investors borrow cheaply in yen to invest in higher-yielding assets overseas – to unwind, technology-heavy stock markets such as South Korea and Taiwan could suffer.
Moreover, higher Japanese bond yields could draw capital away from the US Treasury market, which is already under pressure because of the Fed’s hawkish pivot. “Japan’s rate reset matters beyond its borders: shifting capital flows could add to upward pressure on global yields”, said BlackRock.
What is clear is that while the US is putting pressure on Japanese monetary policy, Japan could end up putting global markets under more strain.


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Banking & finance

The Bank of Japan building in Tokyo on June 15. Photo: Reuters

US Treasury Secretary Scott Bessent holds a press conference to conclude the G20 finance ministers’ and central bank governors’ meeting in Asheville, North Carolina, on September 1. Bessent has put pressure on Japanese policymakers to take more forceful action to strengthen the yen. Photo: EPA

Japanese Finance Minister Satsuki Katayama speaks to the media about the US-Japan forex action upon her arrival at the Finance Ministry in Tokyo, on August 3. Katayama has found US Treasury Secretary Scott Bessent’s reference to himself as “the house” as “a bit scary”. Photo: Reuters 

US Treasury’s Bessent calls on Japan to boost yen through rate increases

People walk past a foreign currency indicator board showing the rate of the US dollar against the Japanese yen in Tokyo on August 3. Photo: EPA

A man shops at a grocery store in Tokyo’s Okubo district on August 23. Photo: AFP

A notepad in front of US Secretary of the Treasury Scott Bessent reads “To Do Buy Japanese Yen $5-10 bil” as he takes part in a cabinet meeting at Camp David on July 31. Photo: Reuters

US Treasury yield hits 19-year high, Japanese yen strengthens: the numbers moving markets

US Treasury Secretary Scott Bessent in Texas on Wednesday. Photo: AFP

The US is telling its trading partners – do as I say, not as I do

US Treasury Secretary Scott Bessent speaks to reporters as he walks to the West Wing following an interview at the White House in Washington on August 20. Photo: EPA

A person walks past an electronic board showing the US dollar and Japanese yen exchange rate at a securities firm in Tokyo on August 3, after the US and Japan launched a coordinated operation to prop up the Japanese currency. Photo: AP 

 A notepad in front of US Treasury Secretary Scott Bessent reads “To Do Buy Japanese Yen $5-10 bil” as he participates in a cabinet meeting at Camp David, Maryland, on July 31. Photo: Reuters 

Opinion

Asia Opinion

World Opinion

Business

Bessent’s intervention could have adverse implications for Japan’s economy, the BOJ’s credibility and tech-heavy stock markets in Asia


Bessent’s intervention could have adverse implications for Japan’s economy, the BOJ’s credibility and tech-heavy stock markets in Asia.


Central banks

Foreign exchange market

Japan

Sanae Takaichi

Scott Bessent

Bank of Japan

US Treasury

Macroscope

United States

Expresses the views, ideas and conclusions of the author. (Eg. Enough of Crazy Rich Asians, think of crazy poor Hongkongers.)


Column

Who’s in control of Japanese monetary policy? Tokyo or Washington?

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Bessent’s intervention could have adverse implications for Japan’s economy, the BOJ’s credibility and tech-heavy stock markets in Asia

Bessent’s intervention could have adverse implications for Japan’s economy, the BOJ’s credibility and tech-heavy stock markets in Asia