Bessent's Influence on Japan's Bond Spending and Fiscal Policy Explained
How U.S. Pressure Shaped Japan's Fiscal and Monetary Decisions
By Tamiyuki Kihara, Makiko Yamazaki, Takaya Yamaguchi and Leika Kihara
Background: The Yen Crisis and U.S.-Japan Dialogue
TOKYO, Sept 18 (Reuters) - When Japanese finance minister Satsuki Katayama called Scott Bessent for help to support the cratering yen in June, her U.S. counterpart's response was familiar: If Tokyo wanted assistance, it had to get its fiscal house in order.
For months, Treasury Secretary Bessent had told Katayama and other officials privately that Japan should rein in its massive fiscal spending and that its central bank needed to raise interest rates, according to three people familiar with the situation.
The Japanese worried that inflation stoked by the weaker yen would hurt Prime Minister Sanae Takaichi with voters. Bessent was more concerned that a sell-off in Japanese bonds could spill over to U.S. debt, the people said. Katayama's call for Washington's help in a coordinated yen-buying spree enabled Bessent to press his case.
He urged Japan to first address fundamental factors driving down the yen — a reference to Takaichi's big spending plans — and avoid any "inconsistency" between monetary and fiscal policies, two of the people said. In short: overhaul the policies that counter the Bank of Japan's fight against inflation.
The June 22 call, the details of which haven't been previously reported, helped set the stage for massive joint intervention by Washington and Tokyo in late July, according to the people, who spoke on the condition of anonymity.
This account of the interactions between Japan and the U.S. shows how Bessent used Washington's leverage over currency and Treasury markets to extract policy concessions from a key ally — forcing Takaichi to navigate the competing demands of voters and her most important security partner.
"Bessent has run out of patience with Japan," said David Boling, managing director for Japan at The Asia Group, a consultancy. The U.S., he said, wants a stronger, more stable yen, less risk of Japanese selling of Treasuries, and policy that looks more credible to markets on inflation and fiscal stability.
Japan's Ministry of Finance and Takaichi's office declined to comment. The BOJ didn't respond to a request for comment.
A U.S. Treasury spokesperson declined to comment on specific private discussions with Japanese officials. Separately, a Treasury official told Reuters "monetary-policy decisions are for Japanese authorities to make" and that "U.S. interest in orderly yen markets is not about targeting a particular exchange rate."
American Leverage and the Push for Policy Change
Risks to U.S. Markets and Bessent's Concerns
A sharp rise in Japan's long-term yields would risk pushing up U.S. borrowing costs, given Japan is the largest foreign holder of Treasuries. For Bessent, who styles himself as "America's leading bond salesman," that would be an unwelcome development as Washington grapples with its own swelling deficit.
When Bessent met Katayama in Japan in May, he stressed the need for higher BOJ rates, three sources said. After that, a rate hike in June or July was considered a given within the Japanese government, said one of the sources.
The BOJ's June hike gave Katayama hope that Bessent would agree to her request for Washington to join a coordinated yen buying spree, said one of the sources.
Instead, Bessent in the June phone conversation repeated his earlier calls for Japan to overhaul spending that he felt undermined the BOJ's efforts to rein in inflation.
"The United States does not want Japan, its ally, to lose economic strength because of excessive yen weakness," said Takehiko Nakao, who served as Japan's top currency diplomat between 2011 and 2013.
The Tension of Abenomics and External Pressure
The call crystallised a tension Takaichi faces: She favours "Abenomics", the mix of big spending and ultra-low rates championed by her political hero, former Prime Minister Shinzo Abe. But she is now pressured by markets and Washington.
That pressure became clear in July when Katayama publicly flagged that Japan's state pension fund, the world's largest, could buy more domestic assets, a move investors read as support for Japan's bond market.
After the BOJ held rates steady in July, Governor Kazuo Ueda struck a hawkish tone, signalling a hike was coming soon.
That signal proved decisive. Moments after the BOJ's meeting, the yen spiked, first on Japan's solo intervention, before combined U.S.-Japanese action extended the rally.
Katayama and her top currency diplomat, Atsushi Mimura, negotiated the joint intervention with the U.S. while the BOJ met, one of the people said.
Despite months of groundwork, the late July intervention came together quickly, this person said.
"This is a culmination of Japan's currency alliance with the United States," Mimura said, announcing the joint intervention.
'I Am the House': Aftermath and Ongoing Friction
Alliance Headwinds and Renewed U.S. Demands
That alliance, however, soon hit headwinds.
Within weeks, the yen slid and Washington grew frustrated with Takaichi's lack of progress in rolling back stimulus and a global spike in bond yields.
At a U.S.-hosted G20 finance leaders' gathering on August 31-September 1, Bessent again called for higher Japanese rates and fiscal tightening. But this time, his message was sharper.
In an interview with Reuters then, Bessent said Japan should "sit back and enjoy the success of Abenomics", noting the age of deflation had passed and that combating inflation, not stimulating the economy, was now the critical objective.
Those remarks were Washington's strongest signal of its displeasure over the remnants of Abenomics it saw in both Takaichi's policy and political loyalists.
"In the past, the message was more along the lines of, 'We expect Japan to pursue the right policies'," Nakao said.
Market Reactions and Political Impact
Days later, Japan's benchmark yield hit a 30-year high above the key 3% milestone, piling pressure on Takaichi to water down her spending ambitions.
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