When the U.S. joined Japan’s efforts to shore up the yen, it wasn’t for nothing. This week, U.S. Treasury Secretary Scott Bessent spelt out the terms: get busy on interest rate hikes and end outdated ideas about big economic stimulus.
A month after a rare joint U.S.-Japan intervention to prop up the yen, Bessent showed little appetite for another market foray by telling recent yen moves were not disorderly.
Instead, he expressed hope Bank of Japan Governor Kazuo Ueda would “do the right thing” on monetary policy to combat a weak yen.
While the BOJ was already widely expected to lift rates in September as inflation pressures grew, Bessent’s comments effectively lock the bank into doing so and put pressure on it to step up hikes going forward.
“The July joint intervention was a message from Bessent for Japan to get its act together on inflation,” said Izuru Kato, chief economist at Totan Research and a veteran BOJ watcher.
“Japan faces a currency crisis that’s becoming hard to control without help from the United States. For such a country, even a rate hike of once every three months may be too slow.”
A weak yen has pushed up import prices and broader inflation, causing headaches for Japanese policymakers by increasing households’ cost of living.
For Washington, too-slow BOJ rate hikes and loose fiscal policy could trigger a selloff in the yen and Japanese government bonds, potentially upending financial markets with spillovers to U.S. Treasury yields – something it wants to avoid.
Markets are focusing on what BOJ chief Ueda could say after attending the two-day G20 finance leaders’ meeting in Asheville, North Carolina, concluding on Tuesday. A U.S. Treasury official told Japanese public broadcaster NHK that Bessent had met Ueda on Sunday and called for the need for rate hikes.
CORNERED BY ECONOMICS AND POLITICS
Even without U.S. pressure, the BOJ’s recent hawkish communication suggests it is gearing up for a near-term rate hike on broadening inflationary pressure.
“Consumer inflation will likely accelerate given all the pressure coming from producer prices. If so, the BOJ must act,” said a source familiar with its thinking.
With a September rate hike already baked in, however, the BOJ may need to pledge speedier increases to alleviate downward pressure on the yen.
“Japan’s real interest rates are clearly too low,” said Japan’s former top currency diplomat Naoyuki Shinohara. “One or two more hikes won’t be enough to reverse the yen’s downtrend.”
Oxford Economics said it now expects the BOJ to raise rates in September and December this year, followed by a third hike in April 2027, a faster pace than initially expected.
“The economic and political cost of disappointing markets and the U.S. has become too big for the BOJ and the government to ignore,” Shigeto Nagai, head of Japan economics at Oxford Economics, said in a report on Monday.
TAKAICHI WON’T BE GETTING OFF ‘SCOTT-FREE’
For dovish Prime Minister Sanae Takaichi, the starkest message may have been Bessent’s calling an end to Abenomics, a mix of massive monetary stimulus, big spending and a growth strategy deployed in 2013 to end prolonged deflation.
Having conquered deflation, Japan should “sit back and enjoy the success of Abenomics and let that run,” Bessent said on the country’s fiscal policy – remarks some analysts saw as a swipe at Takaichi’s expansionary fiscal approach.
“It’s a message to the Takaichi administration to avoid excessively expansionary fiscal policy,” a Japanese government official said on Bessent’s remarks.
“The remarks suggest the United States is escalating its demand on Japanese policy,” said a senior ruling party official.
Both officials spoke on condition of anonymity due to the sensitivity of the matter.
A fan of Abenomics, Takaichi has laid out an ambitious spending plan aimed at boosting investment in growth areas and cushioning the blow to households from rising cost of living.
After her pledge to scrap spending caps on key growth areas, ministries and agencies likely made the largest initial budget request on record for next fiscal year, domestic media reported.
The focus on big spending has unnerved investors and pushed Japanese government bond yields to three-decade highs, which could have spillovers to U.S. Treasury yields.
“The best way to prop up the yen would be for the Takaichi administration to deliver a reliable message pledging fiscal reform,” said Shinohara, who served as deputy managing director at the International Monetary Fund after his finance ministry stint. “But the chance of this happening is very low.”
(Reporting by Leika Kihara)
