Bessent "advises" the Japanese government to "intervene less"—Is a rate hike by the Bank of Japan imminent?

On the eve of the Bank of Japan’s monetary policy meeting, Besant’s rare remarks have once again stirred the market’s sensitivity towards the direction of Japan’s monetary policy.

U.S. Treasury Secretary Besant unusually urged the Japanese government in public, saying Japan should give the Bank of Japan enough policy space to stabilize inflation expectations and the exchange rate. On Wednesday, October 29, Besant posted on social media:

The Japanese government’s willingness to grant the Bank of Japan policy space will be key to anchoring inflation expectations and avoiding excessive exchange rate volatility.

These remarks directly target Japan’s new Prime Minister Sanae Takaichi, who advocates low interest rates. The market interpreted this as external support for the Bank of Japan tightening monetary policy, which heightened expectations for an upcoming rate hike. After this post, the yen strengthened against the dollar from 152.12 to about 151.54.

This public statement came two days after Besant met with Japanese Finance Minister Katsuki Katayama. According to a statement from the U.S. Treasury after the meeting, Besant had emphasized during Monday’s talks the importance of “sound monetary policy making and communication” to stabilizing inflation expectations and preventing excessive exchange rate swings.

Although the market widely expects the Bank of Japan to keep rates unchanged at this Thursday’s meeting on October 30, Besant’s repeated statements have undeniably added weight to the view that the Bank of Japan will hike rates.

Rare Pressure from the U.S.

Besant’s remarks are seen as a direct response to the Japanese new government’s monetary policy stance. The new Prime Minister Sanae Takaichi is an advocate of “Abenomics”; she has urged the Bank of Japan to work with the government to spur demand, which analysts interpret as resistance against rate hikes by the central bank.

Besant’s comments stand in stark contrast to this. He pointed out during the meeting that Japan’s current economic situation is very different from what it was 12 years ago when Abenomics was introduced. This is not the first time he has expressed views on Japanese monetary policy.

In August this year, he said the Bank of Japan was “behind the curve” in dealing with inflation risks; earlier this month, he commented again that if the Bank of Japan follows “proper monetary policy,” the yen’s exchange rate will find its own level.

These statements have rekindled market expectations that Washington may continue to pressure Tokyo to tighten monetary policy faster. Some analysts believe Washington may be pursuing a weak dollar policy to boost U.S. exports, which puts pressure on Japan to allow the yen to appreciate.

The Japanese Authorities Try to Cool Things Down

Facing “guidance” from the U.S., Japanese officials have tried to downplay the impact and uphold the central bank’s independence. Finance Minister Katsuki Katayama told the media on Tuesday that her meeting with Besant did not directly discuss how the Bank of Japan should guide monetary policy.

“I believe Mr. Besant made his remarks on the premise that central banks in every country have independence in decision-making,” Katayama said. She added, “I don’t think he has any intention of urging the Bank of Japan to hike rates.”

Meanwhile, divisions seem to exist within the Japanese government over the weak yen. According to Reuters, Japan’s Minister for Economic Revitalization Minoru Kiuchi said on Tuesday that a weak yen benefits the economy, indicating an optimistic view within the government toward the costs of continued yen depreciation.

The Market Bets on Rate Hikes

Despite cautious official statements, the market has already responded with action. Besant’s remarks gave yen bulls new ammunition and reinforced expectations for a rate hike by the Bank of Japan.

Japan’s core inflation rate has remained above the central bank’s 2% target for more than three years, making some central bankers worry about a second round of price effects. Since exiting its massive stimulus policy in 2024, the Bank of Japan has raised rates twice, but the benchmark rate remains at a low 0.5%.

According to reports, most economists predict that the Bank of Japan will raise rates again in December this year or January next year.

Shota Ryu, FX strategist at Mitsubishi UFJ Morgan Stanley Securities, said: “If Japan wants to correct yen weakness, it must do so through currency intervention or monetary policy.” He thinks the market consensus is that the Bank of Japan will raise rates at the end of the year or early next year and push lending costs up to 1% after a pause.

However, Bank of Japan Governor Kazuo Ueda faces a dilemma. While he has expressed a willingness to continue hiking rates, he also emphasized that, given U.S. economic slowdown and uncertainties brought by President Trump’s tariff policies, the central bank must act prudently.

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