Bank of Japan rate hike exposes cracks in Bessent’s facade

TOKYO – Two words sprang to mind when the Bank of Japan lifted its policy rate to a 31-year high of 1.25% on Friday: Scott Bessent.

No, the US Treasury secretary didn’t cause the 25-basis-point increase announced by Governor Kazuo Ueda. The BOJ was responding to a far more pressing reality: inflation continues to outpace economic growth.

Consumer prices are rising at a 1.9% annual rate while GDP expanded just 0.4% quarter-on-quarter in the April-June period. Had Ueda’s board stood pat, or signaled that further tightening was off the table, it would have risked provoking a bond market backlash.

Yet Bessent has inserted himself into BOJ deliberations and yen policy so aggressively that Japan’s Finance Minister Satsuki Katayama recently described the situation as “scary.”

She was referring in part to Bessent’s startling declaration: “I am the house now. … I have pretty good insight into what the Bank of Japan is going to do, what Japanese policymakers are going to do. You can bet against me if you want.”

The problem for Bessent is that some of the most important people in Tokyo appear to be doing exactly that.

The two BOJ board members appointed by Prime Minister Sanae Takaichi since she took office last October, Toichiro Asada and Ayano Sato, both dissented from Friday’s rate increase, producing a 7-2 split.

Their opposition reinforced the perception that Takaichi remains firmly against further tightening. She has previously dismissed the very idea of additional rate hikes as “stupid.” That leaves one of the biggest questions facing the BOJ ahead of its October and December meetings: how united is Team Ueda on the need to keep normalizing policy?

The yen weakened 1% after Ueda spoke on Friday, suggesting markets didn’t sense much hawkishness in his remarks. Ueda, of course, is keeping his cards close. He knows Japan’s sub-2% inflation rate is a ringer.

It would be far higher if Takaichi’s Liberal Democratic Party weren’t using subsidies to mask oil-driven price gains. And with US President Donald Trump’s war in the Middle East dragging on, 95% of Japan’s oil imports are likely to keep ratcheting higher.

“Overall, though, the BOJ’s statement signaled that it thinks it has more work to do, repeating that the bank will continue to raise the policy interest rate and that it expected accommodative financial conditions to be maintained even after today’s announcement,” says Jessica Hinds, an economist at Fitch Ratings.

Analysts at Danske Bank note that the BOJ could’ve delivered a jumbo rate hike today, but didn’t. Traders are now questioning whether the central bank has the stomach for back-to-back tightening moves.

The bond market is also pushing Ueda to keep normalizing interest rates that have been near zero since 1999. That was the year the BOJ became the first Group of Seven nation to move borrowing costs to zero.

Two years later, in 2001, the BOJ pioneered quantitative easing (QE). Only now is the BOJ achieving real distance from zero. An earlier attempt in 2006 and 2007 didn’t. Before long, zero rates were back, and so was QE.

Ueda seems determined not to reverse his rate hikes since 2024. His job, though, is much harder than Toshihiko Fukui’s time as BOJ head from 2003 to 2008. Since then, the BOJ has supersized its balance sheet. From 2013 to 2018, the BOJ gorged on Japanese government bonds (JGBs) and stocks until its balance sheet topped the nation’s $4.2 trillion economy.

During that period, in 2016, the BOJ experimented with yield-curve-control (YCC) tactics. It also introduced quantitative and qualitative monetary easing (QQE) and intensified its negative interest rate policy (NIRP) to keep JGB yields under wraps. The tactic was a short-term success but a long-term loser. No doubt, it’s helped Tokyo avoid the meltdown, creating Tokyo’s own “widowmaker” trade.

Bessent’s unprecedented intrusions into BOJ affairs add a tantalizing wrinkle to the road ahead. Yet he’s arguably become the world’s most reliable contrarian indicator. Bessent’s confident calls for lower oil prices flopped. His bond buyback gambit stumbled.

His prediction that Washington would haul in more than $300 billion in tariff revenue in 2025 hasn’t aged well. Neither has his bet that propping up the Argentine peso would give President Javier Milei a political boost.

Now add the yen to the list. It’s sliding again despite joint US-Japan intervention—an awkward outcome for a man who recently boasted of having an inside line on BOJ policy.

Only Bessent knows whether his claims about the Treasury’s ability to steer debt markets are calculated bravado or genuine belief. But having cut his teeth in the hedge fund world alongside George Soros and Stanley Druckenmiller, he surely remembers that bond vigilantes don’t cower on command—and that the Federal Reserve doesn’t take its cues from presidential tweets.

“The bond market has taken out more governments than howitzers,” Bessent has said, adding that Trump has “complete confidence in the Fed chair to do the right thing.”

Does he? Trump’s own statements, both recent and from a decade ago, suggest otherwise. Given Bessent’s track record, there’s little reason to share his confidence in either bond market stability or the Fed’s independence—which is exactly what makes this such a precarious moment for global markets.

Bessent, of all people, should recognize the risk. He made his name exploiting cracks in government policy, including the 1990s shorts against the British pound and the Hong Kong and Malaysian currencies. The question now is whether the policies he’s helping craft are inviting one of the biggest shorts in modern history: US Treasuries.

To be fair, the “dollar is doomed” trade has burned plenty of investors over the past two decades, and the greenback is holding up reasonably well even as US debt tops US$40 trillion and Trump leans on the Fed. Gold and crypto aren’t exactly soaring, which they likely would be if markets had truly lost faith in the dollar.

But in claiming he can command the bond market, Bessent seems to be repeating Japan’s own mistake. The irony is thick: he’s spent recent weeks positioning himself as an oracle on Tokyo’s plans.

A second irony: his bond buyback scheme mirrors the very approach Tokyo has leaned on for two decades—using market intervention to cap yields instead of pursuing sound fiscal policy.

Japan’s ruling Liberal Democratic Party, under Prime Minister Sanae Takaichi, might argue the strategy has worked. Ten-year yields sit at just 2.9% despite debt-to-GDP as high as 260%.

But the bond market is signaling that a playbook effective in 1996, 2006, or even 2016 is running out of road. Last week, yields hit a 30-year high of 3%—a jolt that will constrain Takaichi’s options going forward.

Eleven months into her tenure, “Sanaenomics” remains loosely defined, though it clearly favors fiscal loosening, tax cuts, and rock-bottom rates. The bond market is telling her this isn’t the moment for any of that. Yet with no apparent Plan B, the odds support Takaichi sticking to her guns on increased fiscal spending, tax cuts, and a weak yen to boost exports.

Japan, meanwhile, appears to be Bessent’s own Plan B. After nearly 20 months of unsuccessfully pressuring the Fed to cut rates, Treasury officials view getting the BOJ to accelerate rate hikes as a reasonable consolation prize. That is, if Ueda plays ball. It would be in Japan’s best interest if he did, considering how 27 years of near-zero rates are now backfiring on Japan.

It’s made Japan a sitting duck for oil-driven inflation as the Iran war shows signs of deepening. It also squandered a quarter-century during which Japan could’ve increased competitiveness by cutting bureaucracy, rekindling innovation, increasing productivity, making labor markets more meritocratic and restoring Tokyo’s place at the center of Asian finance.

Yet Takaichi hasn’t articulated a strategy that differs from the LDP’s increased-spending/weak-yen approach to every problem. If anything, Takaichi is more likely to double down as her approval rating sinks to all-time lows. It hardly helps that Trump is prodding Tokyo to supersize military spending on top of his demand for a $550 billion “signing bonus” from Tokyo in exchange for a lower tariff.

Earlier this week, Takaishi announced the LDP might soon increase defense spending to 3.5% of gross domestic product. That would put Tokyo in league with NATO and other US allies. It has also sent financial markets into a whirl, as traders reckon debt sales will have to rise to fund the increase. The worry is what credit analysts at Moody’s Investors Service, S&P Global and Fitch might make of such an increase.

The increase would make Trump World happy. But it’s not clear Ueda’s BOJ will make Bessent all that happy going forward. In his post-BOJ meeting press conference, Ueda reiterated that the economy is likely to continue growing moderately (rather than overheating). Ueda also noted that AI-related demand has been supporting the economy, just as it’s been driving growth in South Korea and Taiwan.

The AI angle is also something of a wildcard. Recent volatility in global markets has investors worried AI demand is about to hit a rough patch. If so, the BOJ might be less inclined to tighten than it would be if the AI boom looked set to continue into 2027. In August alone, exports rose 19.3% year-on-year. That followed a 23.2% gain in July, a pace more common among developing economies than a G7 nation.

In the press conference, Ueda concluded: “As for the pace of future rate hikes, we don’t have any pre-set idea in mind such as once every three months. We will determine at each policy meeting how best to ensure underlying inflation stabilizes at 2%.” It’s the sort of phrasing that both hawkish and dovish economists can claim fits their worldview.

Odds are, this on-the-one-hand/on-the-other-hand statement won’t silence Bessent. Whether the yen strengthens from here is a question for hedge fund traders. But given Bessent’s record over the past 19 months, the smart money might be on the yen bears reasserting control – and brandishing the howitzers.

Follow William Pesek on X at @WilliamPesek