US Treasury's Yen Push Lifts BOJ September Hike Odds to 99%

The US Treasury released minutes of Bessent's Aug 30 meeting with BOJ Governor Ueda showing "strong support" for measures to address the "clearly undervalued" yen, pushing September hike odds to about 99 percent.

"I have information that the market doesn't have," Bessent said in a CNBC interview on Aug 31. "And it's my belief that the Japanese government and that the BOJ will do the things that will lead to a stronger yen."

Overnight index swaps price roughly 99 percent probability of a 25 basis point hike at the BOJ's Sept 17-18 meeting, more than double the level a month earlier, according to Bloomberg data. Japan's 10-year government bond yield touched 3 percent on Tuesday, the highest since 1996, while USD/JPY traded near 160 per dollar.

The stakes extend beyond Tokyo. Japan holds the largest foreign position in US Treasuries, and a faster BOJ tightening cycle could pressure longer-dated US debt as Japanese yields rise relative to global peers. The BOJ's benchmark rate stands at 1 percent, with markets debating whether the terminal rate moves to 1.75 percent or higher.

From Joint Intervention to Policy Pressure

The Treasury's public release of meeting minutes marks an unusual escalation. Bessent met Ueda on the sidelines of the G20 finance ministers gathering in Asheville, North Carolina, and separately with Japanese Finance Minister Satsuki Katayama. The minutes state Bessent "strongly supports" Japan's market and monetary policy measures to address the yen's undervaluation, and note that yen weakness is intensifying domestic inflation pressure as import costs feed through to consumer prices.

The push follows the rare US-Japan joint intervention on July 31, when both governments bought yen to stem its slide. That action failed to fully reverse the currency's weakness — USD/JPY has since climbed back toward 160 — prompting Washington to shift toward supporting Japan's own policy adjustment rather than direct market intervention. A senior US Treasury official told NHK that Bessent urged further rate hikes during the Ueda meeting, though the official minutes stop short of that specific language. Reuters reported the Treasury did not confirm the NHK report in its formal readout.

Katayama told reporters that the US and Japan agreed to continue their coordinated effort to achieve "orderly" moves in the yen and remained ready to act in response to "disorderly" market moves, according to Reuters.

10-Year JGB Yield Breaks 3% for First Time Since 1996

The market has responded. Japan's 10-year yield broke above 3 percent on Tuesday, and front-end yields have pushed to multi-decade highs as traders pull forward BOJ tightening expectations. Yet the curve has not flattened the way a faster hiking cycle would normally dictate — the 2s10s spread has narrowed only modestly since mid-June, while 2s30s and 10s30s have actually widened, according to LSEG data cited by FOREX.com.

That divergence raises questions about whether the BOJ can tame the back end of the JGB curve, with potential global implications. Japan is the world's second-largest sovereign bond market behind the US, and a rupture in longer-dated JGB yields could spill into US Treasuries, where the 2-year yield already sits at 4.33 percent, its highest in over a month, after Fed Chair Kevin Warsh's hawkish Jackson Hole remarks.

Takuji Okubo, managing director at Japan Macro Advisors, told CNBC the market may be adjusting the terminal rate from 1.5 percent to 1.75 percent or higher. "A 3 percent 10-year borrowing cost is high in historical perspective, but it just means another step for Japan in leaving deflation in the past," he said.

The BOJ's next policy decision arrives Sept 17-18. If the bank delivers the expected 25 basis point hike, the benchmark rate would reach 1.25 percent — still well below the levels needed to close the yield gap with the US. That gap, and the yen's persistent weakness, is why Bessent's public pressure campaign carries weight: Washington needs Tokyo to act because Japan's $1 trillion of reserves, per Goldman Sachs, leaves ample capacity for further intervention — but selling Treasuries to fund it would destabilize the very market the US is trying to protect.

This article is for informational purposes only and does not constitute investment advice.