The scribble on a US Treasury notepad earlier this month might have looked casual, but it was no ordinary to-do list. Scott Bessent’s note to buy tens of billion dollars’ worth of Japanese yen was photographed and billboarded as a scoop, helpfully telegraphing the US treasury secretary’s intention to prop up the Japanese yen.
Bessent worked for billionaire George Soros for 13 years, including as his chief investment officer between 2011 and 2015. Bessent’s equivalent of holding a placard up for traders around the world worked in the short-term.
On cue, the yen rose against the US dollar after that intervention by the US Treasury, which used euros to buy yen.
But it was an unusual event that also cast an unflattering spotlight on the weaknesses of these two highly indebted financial superpowers.
As Japan has transitioned from its zero-interest rate policy after ending decades of deflation, the cost of servicing its immense debt has risen—Japan’s ministry of finance projects its debt service cost will rise to 30% of total expenditure by 2029-30, up from just a quarter last year.
Many Western commentators interpreted the US helping an ally as a move driven by self-interest. “Mr. Bessent is doing so to help ensure that Washington’s borrowing costs do not (go) even higher,” observed The New York Times.
If the Bank of Japan (BoJ) had sold billions of dollars to boost the yen, it would have driven up US government bond yields, which have steadily moved to more than 5% for the 30-year Treasury “in part because doubts have crept in over the Federal Reserve’s true willingness to tackle sticky inflation with higher interest rates,” noted Katie Martin, a columnist for the Financial Times.
In both the case of the BoJ and Fed, it is abundantly clear that their respective political executives want low interest rates. While Trump has been silent on the subject since his nominee Kevin Warsh took over as head of the Fed, a large part of his open hostility towards former chair Jerome Powell, whom he appointed in 2018, was due to Powell’s unwillingness to cut rates, given how entrenched inflation had become.
Similarly, Japanese Prime Minister Sanae Takaichi’s government is understood to have a tricky relationship with BoJ governor Kazuo Ueda. Ueda, a long-time academic, has struggled to project the need for higher interest rates even as Japanese consumption and salaries have more than recovered.
Unlike, say, Raghuram Rajan when he was RBI governor, Ueda seems unable to make his case to the public. Japanese conventions, such as a representative from the government occasionally sitting in on BoJ rate-decision meetings, have been resorted to; Japan’s economy minister has attended meetings time and again since Takaichi took over.
Six months since Takaichi’s landslide win for the Liberal Democratic Party, her attempts to bend the BoJ to her looser monetary policy views may cost her in the long run.
As the veteran Japan-watcher Bill Emmott, author of the prescient 1989 bestseller, The Sun Also Sets: The Limits of Japan’s Economic Power, observed in a Substack post, the result is a rather muddled economic policy that harks back to the ministry of international trade and industry’s pivotal role in Japan’s glorious economic ascent in the post-war decades but will not work well amid Japan’s aging crisis.
Nonetheless, as in just about every major economy today, industrial policy rocks. Takaichi, who enjoys playing the drums, polished an image as a catalyst for change. The government has identified 17 sectors, predictably including quantum computing and semiconductors but also the vaguely termed content industry.
The overly broad brief for ‘Make in India’ also suffers from similar mission creep. As Emmott quips, “Looking at the list, it can feel as if the government felt the need to be inclusive, for fear of stigmatising sectors as non-strategic.” The government is counting on a staggering 222 trillion yen of private investment.
This boost to private and public spending at a time when labour markets are tight is likely to trigger higher inflation in Japan. The Takaichi government’s fiscal policy is also a work-in-regress.
The government is likely to slash the consumption tax to 1% on food from next year, in part to soften the effects of inflation, just when it needs to boost government revenues to fund its ambitious industrial policy and additional defence spending in response to a more belligerent Beijing.
While the US Treasury’s intervention in early August arrested the slide of the yen, which had fallen to 163 against the dollar, this week the currency started to fall again to around 159.
That the intervention was done without involving the European Central Bank (ECB) and the US used euros rather than dollars suggests a division among international monetary policy authorities. Bessent’s experience as a former trader is unquestionable, but his ability to play the international diplomat seems in doubt.
Matters were made worse by a Trump administration official taking the moral high ground by arguing that it respected “the confidentiality of private discussions, unlike the ECB.” Bessent’s support for Ueda to raise rates may also be an issue with the Takaichi government.
And with the yen carry trade—where large investors use low interest rates in Japan to take yen loans to invest in assets elsewhere—such an integral part of financial markets today, US intervention could increase asset volatility. Bessent’s to-do list promises to become more complicated.
The author is a former Financial Times foreign correspondent.