Global Market: Bessent's BOJ comments raise expectations of September rate hike, spark independence concerns

US Treasury Secretary Scott Bessent's recent remarks on Japan's monetary policy have strengthened market expectations that the Bank of Japan (BOJ) could raise interest rates at its September policy meeting, while also prompting debate over the extent of Washington's influence on Japan's monetary decisions, according to Reuters.

The discussion follows last week's rare joint currency market intervention by Japan and the United States to support the yen after its sharp decline. While the coordinated action helped stabilize the Japanese currency, Bessent argued that intervention alone is insufficient and should be backed by tighter monetary policy.

According to Reuters, Bessent believes further BOJ rate hikes are necessary to reassure markets that Japan is taking sufficient steps to combat inflation. Concerns that the central bank has been slow to tighten policy have pushed Japanese government bond yields higher, with potential spillover effects on U.S. Treasury markets.


BOJ faces growing pressure
Although the BOJ has already indicated that additional rate increases may be needed, Bessent's public comments have intensified speculation that policymakers may move sooner rather than later.

Kazuo Momma, a former BOJ executive and now executive economist at the Mizuho Research Institute, believes the joint intervention has effectively given the central bank greater freedom to raise rates. However, he also warned that U.S. participation in the intervention creates expectations that monetary tightening will follow, making it more difficult for Japanese authorities to delay further policy action.

Japan's legal framework grants the BOJ operational independence while requiring close coordination with the government's broader economic policies. Historically, however, the central bank has occasionally faced political pressure to respond to major economic shocks, including sharp currency movements.

Bessent signals confidence in BOJ
Following the intervention, Bessent used several media appearances to express confidence that BOJ Governor Kazuo Ueda would pursue policies aimed at restoring stability to the yen.

According to Reuters, Bessent said in interviews that Japan should complement currency intervention with policy measures addressing the underlying weakness of the yen. He also indicated that U.S. officials believe Japanese policymakers are committed to implementing measures that would help the currency return to a more balanced valuation.

The BOJ, meanwhile, kept interest rates unchanged at its latest policy meeting but delivered one of its strongest warnings yet about the growing risk of inflation exceeding expectations, leaving the door open for a rate increase as early as September.

Markets focus on upcoming meetings
Attention is now turning to a planned meeting between Bessent and BOJ Governor Kazuo Ueda during the G20 finance leaders' gathering later this month, just weeks before the BOJ's September 17-18 policy meeting.

A report by Reuters stated that several sources familiar with the BOJ's thinking believe the central bank is increasingly likely to raise rates either in September or October. Some of those sources suggested that if the Bessent-Ueda meeting takes place as expected, avoiding a September increase could become more difficult.

Investors are also expected to closely monitor a speech by BOJ Deputy Governor Ryozo Himino on August 27 for potential signals about the timing of the next policy move.

Japan's Chief Cabinet Secretary Minoru Kihara declined to comment directly on Bessent's remarks, saying decisions on monetary policy remain the responsibility of the BOJ, as per the report.

Rate path in focus
The BOJ ended its decade-long ultra-loose monetary policy in 2024 and has gradually raised interest rates, including a June increase that lifted the policy rate to 1%, the highest level in more than three decades.

However, the relatively slow pace of tightening has been blamed by some market participants for contributing to the yen's weakness by maintaining a wide interest-rate differential with the United States.

The weak currency has become an increasing concern for Japanese policymakers as it raises import costs and adds to inflationary pressures, particularly amid elevated energy prices linked to geopolitical tensions in the Middle East.

According to a Reuters poll, most economists expect the BOJ to deliver another rate increase before the end of the year, with October currently viewed as the most likely timing, although September remains a possibility.

Some analysts believe that a September hike could lead investors to expect a faster pace of tightening, potentially shifting expectations toward quarterly rate increases instead of the current pattern of roughly two hikes per year.

Ayako Fujita, chief Japan economist at JPMorgan Securities, told Reuters that while the BOJ has opened the possibility of a September increase, policymakers may prefer to wait until October to better assess the economic effects of previous rate hikes. She added that the timing of the next move will likely depend heavily on developments in the yen.