Nudge from Bessent firms case for BOJ rate hike in September

By Leika Kihara

TOKYO, Aug 5 (Reuters) – U.S. Treasury Secretary Scott Bessent’s public views on Japan’s monetary policy have all but locked the central bank into an interest rate hike at its September meeting and raised questions about Washington’s influence over domestic policy.

Bessent has had a busy media schedule since the joint intervention in the currency markets by Tokyo and Washington last week to shore up the battered yen, promoting the rare co-operation as a much-needed win for Japan’s economy.

For Bessent, however, intervention needs to be followed up with rate hikes to arrest market fears the Bank of Japan is behind the curve in combatting inflation, concerns that have pushed up JGB yields and risked spilling over to already rising U.S. Treasury yields.

While that imperative aligns with the BOJ’s current central view on the need for further rate hikes, there are concerns about the precedent U.S. pressure is setting for Japanese policy.

Kazuo Momma, a former BOJ executive who is currently executive economist at private think tank Mizuho Research Institute, said the joint intervention has given the BOJ a free hand to raise rates – but that comes with a catch.

“Intervention is a strategy that buys time and could end up being a waste without being followed up with BOJ rate hikes,” said Momma. “The fact the United States joined in the intervention is very grave. If the Japanese government were to block the BOJ from raising rates, that would be an act of betrayal to the United States.”

Japan’s law grants the central bank independence from political interference, but also requires close coordination with the government’s economic policy.

The BOJ has historically come under political pressure to fend off external shocks, such as volatile yen moves, with monetary policy.

CLOSE CONVERSATIONS

The joint intervention appears to have worked for now, giving the yen more enduring support than past unilateral actions by Japan have.

In an interview with public broadcaster NHK, Bessent said he was sure BOJ Governor Kazuo Ueda will “do what is best” for Japan’s economy suffering from a weak yen.

In a separate interview with CNBC, Bessent also urged Japan to follow intervention with “policy and fundamentals” to address what he saw as a substantial undervaluation of the yen.

“Through our conversations with them, we believe that they are going to continue to put the right policies in place that will lead the yen to get back to more of a normal equilibrium price,” Bessent told CNBC about his discussions with Japan.

In keeping rates steady last week, the BOJ, too, left scope for a hike as soon as September by issuing the strongest warning to date on mounting risks of an inflation overshoot.

All eyes will be on a meeting Bessent said he would have with Ueda at a U.S.-hosted G20 finance leaders’ gathering at end-August, which precedes the BOJ’s September 17-18 policy meeting.

“Given its hawkish signals, it’s clear the BOJ will hike either in September or October,” a source familiar with the matter said, a view echoed by another source.

“If the Bessent-Ueda meeting were to take place, it would be very hard for the BOJ to avoid raising rates in September,” a third source said.

BOJ Deputy Governor Ryozo Himino will also deliver a speech in Japan on August 27, which could offer clues on whether the central bank could hike in September.

“There’s probably no strong views yet within the BOJ on the next rate-hike timing. But if it wanted to hike in September, it would need to drop signals in advance,” a fourth source said.

The sources spoke on condition of anonymity as they were not authorised to speak publicly.

In a news conference on Wednesday, Chief Cabinet Secretary Minoru Kihara declined to comment on Bessent’s remarks and said specific monetary policy means were left to the BOJ to decide.

QUARTERLY HIKES?

The BOJ ended a decade-long, massive stimulus in 2024 and raised interest rates several times including in June, when it took its policy rate to a 31-year high of 1%.

But the slow pace of hikes has been blamed for the yen’s slide to 40-year lows by keeping the Japan-U.S. rate gap wide.

A weak yen has become a headache for policymakers by pushing up import prices and, coupled with rising fuel costs from the Middle East conflict, raising households’ cost of living.

The timing of the BOJ’s next rate hike will affect market perceptions on how quickly and by how much the central bank will push up borrowing costs in the future.

A majority of analysts polled by Reuters expect the BOJ to raise rates again by December and possibly as soon as October.

Hiking in September, rather than October, could fuel market bets the BOJ will raise rates once every quarter, rather than the current speed of roughly twice a year, some analysts say.

“While the BOJ did open the door for a September rate hike, it probably wants to wait until October to spend more time scrutinising the economic impact of past rate increases,” said Ayako Fujita, chief Japan economist at JPMorgan Securities.

“Hiking rates in September would also turn the December meeting into a live one, something the Takaichi administration may not be happy with,” she said. “The timing will really depend on yen moves.”

(Reporting by Leika Kihara; Editing by Sam Holmes)