Key Takeaways:
Bessent's G-20 remarks pushed overnight swaps to an 88 percent probability of a BOJ rate hike at the September meeting.
US Treasury Secretary Scott Bessent said he expects Bank of Japan Governor Kazuo Ueda to "do the right thing" on monetary policy, reinforcing market bets on a September rate hike as the yen trades near the 160 intervention line.
"I'm not going to tell them what to do," Bessent said on Sunday, when asked whether the central bank should consider consecutive rate hikes to combat the weak yen. "I'm going to say that I do think that we probably reached the end of Abenomics, which was a reflationary program."
The dollar stood at 159.73 yen on Monday, close to the 160 mark that triggered a rare joint US-Japan yen-buying intervention on July 31 — the first coordinated move since 1998. Overnight swaps pointed to an 88 percent likelihood of a hike at the BOJ's September 17-18 meeting, while Japanese front-end yields pushed to fresh multi-decade highs.
A September hike would be the BOJ's second this year after June's increase, and sources told Reuters the central bank is weighing a faster pace of roughly once per quarter after that. That would narrow Japan's wide rate differential with the US, potentially unwinding yen carry trades that have supported global risk assets.
Bessent, who is expected to meet Ueda on the sidelines of the Group of 20 finance leaders' gathering in Asheville, North Carolina, told CNBC on Monday that he has "information that the market doesn't have" and believes "the Japanese government and the BOJ will do the things that will lead to a stronger yen." When asked whether that meant raising rates, he said: "I think the market's pricing that in now."
The Treasury secretary has repeatedly urged the BOJ to proceed with policy normalization, arguing this would allow the yen to find an appropriate level. His comments have been among the factors driving markets to nearly fully price in a September hike, according to overnight index swaps.
The BOJ raised rates in June, and sources said the central bank is considering hiking more aggressively than the current pace of roughly two times per year. A hike next month rather than in October could fuel market bets the BOJ will raise rates once every quarter, according to Reuters.
A weak yen has pushed up import prices and broader inflation, creating headaches for Japanese policymakers. The slow pace of BOJ hikes has kept Japan's rate differential with the US wide, contributing to persistent yen weakness. The joint intervention on July 31 showed determination to prevent a selloff in the yen and Japanese government bonds from spilling into global markets.
While that action failed to put a sustained floor under the yen, Bessent told Reuters he did not see recent yen moves as disorderly, suggesting Washington was not inclined to join Tokyo for another intervention.
The yen gained against the dollar after Bessent's comments on Monday, with USD/JPY starting the week on the back foot as Japanese front-end yields reached multi-decade highs. The last time the BOJ raised rates in June, the yen strengthened briefly before resuming its slide, showing the challenge of sustaining currency support through policy alone.
For investors, the stakes are significant. An accelerated BOJ hiking cycle would compress the yield differential that has made the yen a favored funding currency for carry trades. A rapid unwind of those positions could trigger volatility across emerging market currencies and risk assets, while higher Japanese yields would also pressure domestic equities and government bond prices.
This article is for informational purposes only and does not constitute investment advice.
