Bessent Presses Japan on Fiscal Policy as Yen Struggles

U.S. Treasury Secretary Scott Bessent has pushed Japan to tighten fiscal policy and support higher interest rates as Washington and Tokyo work to stabilize the yen and limit risks in global bond markets.

Japanese Finance Minister Satsuki Katayama sought U.S. assistance in June as the yen weakened sharply, according to people familiar with the discussions. Bessent responded by urging Tokyo to address the underlying causes of yen weakness, including heavy government spending that could conflict with the Bank of Japan’s efforts to control inflation.

The June 22 conversation helped pave the way for coordinated U.S.-Japan yen-buying intervention in late July. Washington’s concerns extended beyond Japan’s currency. A sharp sell-off in Japanese government bonds could push up U.S. Treasury yields because Japan remains the largest foreign holder of U.S. government debt.

Bessent had previously encouraged higher BOJ interest rates during a May meeting with Katayama. The central bank raised rates in June, but Washington continued pressing Tokyo for greater consistency between monetary and fiscal policy.

After the BOJ kept rates unchanged in July while signaling further tightening, Japan intervened in currency markets before the U.S. joined the operation. The coordinated action initially strengthened the yen, although the currency later resumed its decline.

Pressure intensified at the August 31-September 1 G20 finance meeting, where Bessent again called for tighter Japanese fiscal policy and higher rates. Japan’s benchmark bond yield subsequently climbed above 3%, its highest level in three decades.

Prime Minister Sanae Takaichi now faces a difficult balance between Washington’s demands, market concerns and her domestic economic agenda. Her government continues to favor subsidies, tax measures and investment spending designed to support households and growth.

Budget requests for the next fiscal year have reached 143 trillion yen ($916.14 billion), while Takaichi aims to keep new bond issuance near 40 trillion yen for the fiscal year ending March 2028.

With the BOJ delivering another widely expected rate hike on Friday, attention is increasingly shifting toward whether Tokyo will also adjust fiscal policy to stabilize the yen and contain rising Japanese bond yields.