How US Pressure Shaped Japan's Yen Intervention and Fiscal Debate

When Japanese Finance Minister Satsuki Katayama called US Treasury Secretary Scott Bessent in late June to seek help for the weakening yen, the response was consistent with months of private messaging: Washington wanted Tokyo to put its fiscal house in order first.

According to people familiar with the discussions, Bessent had repeatedly told Katayama and other Japanese officials that Japan needed to curb heavy fiscal spending and that the Bank of Japan should raise interest rates. The June 22 call, details of which had not been previously reported, helped set the stage for a large joint intervention by Washington and Tokyo in late July.

Japanese officials were worried that inflation driven by a weaker yen would hurt Prime Minister Sanae Takaichi politically. Bessent was concerned that a sell-off in Japanese government bonds could spill over into US debt markets. Japan is the largest foreign holder of US Treasuries, and a sharp rise in Japanese long-term yields could push up US borrowing costs.

Bessent urged Japan to address the fundamental factors weighing on the yen — a reference to Takaichi's big spending plans — and to avoid inconsistency between monetary and fiscal policy. When the two met in Japan in May, Bessent stressed the need for higher BOJ rates, and a rate hike in June or July was subsequently considered a given within the Japanese government, one source said. The BOJ's June hike gave Katayama hope that Washington would agree to join a coordinated yen-buying effort.

Instead, Bessent repeated his calls for Japan to overhaul spending that he felt undermined the BOJ's inflation fight. The call crystallised the tension Takaichi faces: she favours "Abenomics", the mix of big spending and ultra-low rates championed by former Prime Minister Shinzo Abe, but is now under pressure from markets and Washington.

That pressure became visible in July when Katayama publicly flagged that Japan's state pension fund could buy more domestic assets, a move investors read as support for the bond market. After the BOJ held rates steady in July, Governor Kazuo Ueda struck a hawkish tone, signalling a hike was coming soon. Moments after the BOJ's meeting, the yen spiked, first on Japan's solo intervention, before combined US-Japanese action extended the rally. Katayama and top currency diplomat Atsushi Mimura negotiated the joint intervention with the US while the BOJ met, one person said.

Within weeks, the yen slid again and Washington grew frustrated with what it saw as slow progress in rolling back stimulus, compounded by a global spike in bond yields. At a US-hosted G20 finance leaders' gathering on August 31-September 1, Bessent again called for higher Japanese rates and fiscal tightening, but his message was sharper. He said Japan should "sit back and enjoy the success of Abenomics", noting the age of deflation had passed and that combating inflation, not stimulating the economy, was now the critical objective.

Days later, Japan's benchmark yield hit a 30-year high above the key 3% milestone, piling pressure on Takaichi to water down her spending ambitions. US scrutiny prompted Katayama to assure her G20 counterparts that Japan would shed its over-reliance on additional spending and avoid issuing debt to fund tax cuts. After a meeting with Bessent at the G20, Katayama recounted showing him remarks by Takaichi to a Japanese newspaper stressing her resolve to "achieve growth and fiscal discipline simultaneously". He seemed to understand, she said.

A week later, Bessent was again helping Japan with strong warnings against yen bears, saying he had asymmetric information and good insight into what Japanese policymakers, including the BOJ, would do. "I am the house now," he said this month, adding "you can bet against me if you want." The yen jumped against the dollar.

Bessent's demands broadly align with the BOJ's policy direction, with the central bank expected to lift rates again on Friday. On fiscal plans, however, there is a bigger gap. Takaichi cannot easily retreat from flagship stimulus plans that drove her party to victory in this year's election, and her handouts and subsidies to curb fuel costs helped ease anger over the rising cost of living. Forcing Takaichi to abandon tax plans is also risky for Washington if it weakens an administration of a reliable US ally to counter an assertive China. After joining Tokyo in shoring up the yen, President Donald Trump emphasised the importance of the US partnership with Japan. In a move analysts saw as placating markets and Bessent, Takaichi reappointed Katayama as finance minister in a cabinet reshuffle on Thursday.