Key points of the meeting between Bessenter and Ueda Kazuo: Both sides reached a consensus on accelerating interest rate hikes, potentially marking the end of "Abenomics".

The meeting between US Treasury Secretary Bessenter and Bank of Japan Governor Ueda during the G20 summit is becoming a focal point in the global foreign exchange and interest rate markets. The core issue of market focus is whether the two sides can reach a public consensus on the undervaluation of the yen and the need for the Bank of Japan to accelerate its interest rate hikes, thus bringing an end to "Abenomics."

According to a recent research report by Nomura Securities' Naka Matsuzawa, on the eve of the meeting, Bessant, in an interview with Reuters, used unusually direct language, stating, "I think Abenomics—a reflation program—may have come to an end," and expressing his belief that the Bank of Japan will "do the right thing" with its monetary policy. This is Bessant's most explicit public statement to date, a significant escalation from his previous numerous subtle hints.

Market expectations for a Bank of Japan rate hike on September 18 continue to rise. According to Nomura Securities, the market is currently pricing in a 68% probability of a rate hike before the September FOMC meeting. The neutral interest rate proxy for the yield on 10-year Japanese government bonds—the 5-year forward OIS rate—has risen to 2.97%, approaching the 3% mark, a level rarely seen in decades.

Against this backdrop, both the Japanese stock and bond markets came under pressure. Bank stocks, benefiting from rising interest rates, are nearing their cyclical highs, but almost all other domestic demand-related stocks remained weak, indicating that expectations of interest rate hikes have begun to exert substantial pressure on the real economy. As for the yen, the USD/JPY exchange rate hovered between 159.5 and 160, with the effects of the record-breaking intervention having largely subsided.

Bessant's stance escalates: He explicitly calls for Japan to bid farewell to reflation.

Bessant's remarks in an interview with Reuters represent a public and systematic shift in his consistent stance. Over the past year, he has repeatedly hinted, somewhat subtly, that he prefers to fundamentally support the yen through interest rate hikes by the Bank of Japan, rather than repeated market interventions by the Ministry of Finance. His direct statement at this G20 event signifies a change in the nature of US pressure—from coordinated market operations to a public endorsement of policy.

In an interview with CNBC, Bessant also stated, "I cannot influence the natural equilibrium exchange rate; all we can do is send signals. I have information that the market doesn't know, and I believe the Japanese government and the Bank of Japan will take actions that will help the yen strengthen," noting that "the market has already priced in the interest rate hike expectations." He also stated in a Reuters interview that the recent yen's movements are "quite well under control," unlike the "disorderly" market conditions that triggered previous interventions.

The market interpreted the above statements as a unanimous signal: the US hopes the Bank of Japan will replace foreign exchange market intervention with policy actions to structurally correct the undervaluation of the yen.

Kazuo Ueda's role: Not a perfect match, but significant.

Bessenter's direct policy counterpart is Japanese Finance Minister Satsuki Katayama, but the market is more focused on Bessenter's private meetings with Kazuo Ueda. According to Naka Matsuzawa, although Ueda is not Bessenter's official counterpart, the two have known each other for many years, and Bessenter has considerable confidence in Ueda as a policymaker. Following previous foreign exchange interventions, Bessenter publicly stated his desire to meet with Ueda.

The key to this meeting lies in whether Ueda and Bessenter can reach a clear consensus on the "undervaluation of the yen" and the "need for the Bank of Japan to accelerate its interest rate hikes," and convey this signal to the market in some form. However, Matsuzawa also cautioned that it remains unclear how much of the substantive content of the meeting will actually be disclosed to the outside world through press conferences or other media channels.

Hank Calenti, chief global market strategist at SMBC EMEA, said, "The key is the narrative and how hawkish the governor's rhetoric is," adding that subtle changes in Ueda's wording in subsequent public statements could directly alter the shape of the Japanese government bond yield curve.

The effectiveness of intervention remains questionable; raising interest rates may be the only solution.

Japan's Ministry of Finance disclosed last Friday that foreign exchange intervention reached a record high of ¥15.4 trillion (approximately US$96.4 billion) over the past month. However, the practice in July fully exposed the limitations of intervention: coordinated buying operations briefly pushed the USD/JPY exchange rate back to around 155, but just one month later, the exchange rate was approaching the 160 mark again. The market repeatedly reverts to the same logic: strong carry trade momentum, low exchange rate volatility, and Japan's monetary policy still lagging behind the yield curve.

The scale of US intervention is expected to be far smaller than that of Japan, and Bessant himself has admitted that he cannot influence the "natural equilibrium level" of the exchange rate. Against this backdrop, the market consensus is becoming increasingly clear: without substantial monetary policy tightening, mere foreign exchange market intervention is unlikely to have a lasting effect.

Neutral interest rate nears 3%: Japanese bond market faces structural revaluation

In a report, Nomura Securities' Matsuzawa noted that the market expectation for the neutral interest rate of Japanese 10-year government bonds, measured by the 5-year forward OIS rate, has risen to 2.97%. This level is higher than the sum of Japan's 5-year inflation expectations (break-even inflation rate of 2.3% to 2.4%) and the Bank of Japan's estimated real neutral interest rate range (-0.9% to +0.5%), and cannot be fully explained by domestic factors alone.

Matsuzawa points out that the simultaneous rise in Japanese yields along with US yields is a significant driver of this widening gap. Currently, both the US market and the Federal Reserve are accumulating momentum to revise upward expectations for the neutral interest rate, thus continuously pulling on long-term Japanese yields. Until the upward trend in US long-term yields continues, investor demand for long-term Japanese government bonds is unlikely to improve substantially.

However, the market is not without potential support. According to Bloomberg, a major life insurance company stated in an interview last week that a 3.0% yield on 10-year Japanese government bonds would present good investment value, and they might revise their plans to increase their holdings of Japanese government bonds again. Since life insurance companies are primarily active in the ultra-long term, Thursday's 30-year bond auction may be more indicative than today's 10-year auction. Matsuzawa warned that if demand for the 10-year auction is weak, life insurance companies may choose to wait and see, and demand for 30-year bonds will also be difficult to boost.

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