US Treasury Secretary Scott Bessent has repeatedly urged Japanese officials to reduce government spending and support higher interest rates, as Washington seeks to address yen weakness and inflationary pressure in Japan. Reuters reported that Bessent used Japan’s request for US assistance on the yen as an opportunity to push for changes to the country’s economic policies.
The US concerns extend beyond the exchange rate. Japan is the largest foreign holder of US Treasury securities, and Washington has been watching the potential connection between instability in Japan’s government bond market and demand for US Treasuries. A shift toward selling US government debt could add pressure to US borrowing costs.
Bessent continued to call for higher Japanese interest rates and greater fiscal discipline at the G20. Japanese Finance Minister Satsuki Katayama has also sought to reassure G20 counterparts about Japan’s fiscal management, while emphasizing that monetary policy decisions remain under the Bank of Japan’s jurisdiction.
The pressure adds another dimension to Japan’s monetary-policy debate. The Bank of Japan has since raised its policy rate to 1.25%, its highest level in 31 years, while Governor Kazuo Ueda has indicated that further increases will depend on inflation and economic developments.
For markets, the key issue is the interaction between Japan’s fiscal policy, BOJ rate decisions, the yen and global bond markets. Changes in Japanese demand for domestic and overseas bonds could have implications beyond Japan, particularly given the country’s large role in the US Treasury market.
