Scott Bessent may have imagined a triumphant return to hedge fund row after his stint as US Treasury secretary. Right now, that homecoming looks like it needs a rewrite.
Bessent came up under George Soros and Stanley Druckenmiller, and he’s been leaning on that pedigree as leverage over markets themselves — warning traders who bet against his priorities that they’ll get burned.
He’s cautioned against pushing oil higher, driving bond yields up, or selling the yen, suggesting his inside knowledge, financial muscle and government connections give him an edge no ordinary trader can match.
But markets aren’t buying it. Oil has climbed back above $100 a barrel. Treasury yields, despite a massive government buyback program meant to hold them down, are drifting toward multi-year highs near 4.85%, with 5% looking increasingly likely.
Nobel laureate Paul Krugman has argued that Bessent’s efforts to talk rates down are simply failing. It’s clear his “attempts to push down US interest rates … are failing with flying colors,” Krugman wrote in a Substack post.
The yen, meanwhile, is off its highs, even as Bessent claims, bizarrely, that “I am the house now” where betting against the yen is concerned.
That claim would likely surprise Japan’s own finance minister, Satsuki Katayama, and Bank of Japan Governor Kazuo Ueda — and it’s doing little for Bessent’s credibility.
This week’s yen strength looks, on the surface, like a turning point. The joint US-Japan intervention to prop up the currency — the first of its kind since 1998 — has traders on edge. But the rally rests on two shaky premises.
First, a stronger yen cuts against what Prime Minister Sanae Takaichi actually wants. With Japan’s economy stalling, her approval ratings sinking and Chinese exports up 25% year-on-year, she has every incentive to keep the yen weak — just not weak enough to anger Washington.
Second, Bessent’s real fight isn’t with Tokyo at all — it’s with the US Federal Reserve. Japan’s chronically undervalued currency has been official policy for decades.
Since the late 1990s, successive prime ministers have pushed the BOJ toward easier money and a softer yen, and Takaichi — a protégé of the late Shinzo Abe — has followed that script aggressively since taking office last October, cutting taxes, ramping up spending, and openly dismissing the case for higher rates as “stupid.”
Reality is intervening anyway. Bond vigilantes have pushed 10-year Japanese government yields to 3%, a three-decade high, and even Takaichi’s allies are coming around to the idea that rates need to rise. The weakest yen in 40 years drove up import costs and inflation, forcing the issue.
The BOJ is widely expected to raise its benchmark rate a quarter point, to 1.25%, at its September 18 meeting. “A September BoJ rate hike is now near-consensus” in markets, says Sho Nakazawa, strategist at Morgan Stanley MUFG, “with a pronounced shift toward pricing in earlier and more rate hikes.”
What happens after that is far less certain. Japan’s economic growth is weak — just 0.4% quarter-on-quarter in the second quarter — and Takaichi’s popularity is near record lows.
Moody’s Analytics economist Stefan Angrick notes that soft wage growth is dragging on demand, business investment plans are stalling and risks from the Middle East, US tariffs and China trade tensions all point downward.
Stagflation is a real threat for the second half of the year, leaving the BOJ to weigh two competing pressures: a Trump administration eager to see the dollar weakened (and possibly pushing for a broader currency accord), against a domestic political establishment that has spent 30 years resisting higher rates.
Governor Ueda is acutely aware of this tension. He wants to avoid repeating the mistakes of the mid-2000s, when the BOJ’s last real attempt to escape zero rates ended badly.
The pattern goes back decades. Japan’s ruling party has consistently pressured the BOJ to hold rates near zero or push them lower. In 1999, the BOJ became the first G7 central bank to cut rates to zero, and it largely stayed there under sustained political pressure, later adding waves of quantitative easing on top.
The closest the BOJ came to genuine normalization was under Governor Toshihiko Fukui, from 2003 to 2008, when the bank unwound QE and raised rates to 0.5%.
A mild recession, followed by the 2008 financial crisis, sent policy straight back to zero. His successor immediately restarted QE, and when Haruhiko Kuroda took over in 2013, he supercharged it.
That eventually made the BOJ so dominant in the government bond market that some securities went days without trading, and turned it into the largest owner of Japanese stocks via exchange-traded funds. By 2018, its balance sheet exceeded the size of Japan’s entire $4.2 trillion economy.
Ueda arrived in 2023 promising to finally unwind all of this, but moved too cautiously in 2023 and 2024 to shift decisively toward tightening. By the time Trump’s trade war hit in 2025, his window had narrowed considerably — and then Takaichi took office and revived Abenomics in full, further constraining how far the BOJ can go from its current 1% rate.
The slow pace of Japanese tightening has drawn the Trump administration’s attention regardless. When Bessent visited Tokyo in May, he called the yen undervalued and pushed the BOJ to move faster, framing Japan’s fundamentals as strong enough to justify a stronger currency and stressing close coordination with Japan’s finance ministry — comments that foreshadowed this month’s joint intervention.
But that focus on Japan may be a distraction from Bessent’s bigger, unsolved problem: the Fed. Trump has had little success pressuring the US central bank to cut rates.
Former Chair Jerome Powell resisted pressure to step down, and his Trump-appointed successor, Kevin Warsh, hasn’t delivered cuts either – at least not yet. With inflation running at 3.4% year-on-year in July, a Fed rate hike next week looks more likely than a cut.
Trump has responded by threatening to cut off trade with countries running surpluses with the US — including China, Mexico and Vietnam — even as the overall US trade deficit has grown to $1.2 trillion despite Trump’s tariffs.
Seen this way, pressuring the BOJ to tighten looks like Bessent’s fallback plan: if he can’t get the Fed to ease, maybe he can get Tokyo to do the opposite of what it’s been doing.
There’s a real case that the yen could strengthen once the fallout from the Iran conflict fades and the Strait of Hormuz fully reopens. But it’s unclear Takaichi’s government would tolerate a surging currency while GDP is flatlining.
The deeper issue, critics argue, is that Bessent is treating symptoms rather than causes — talking tough about currency levels while underlying economic pressures keep building.
Krugman has been blunt on the score, suggesting Bessent is spending down what little market credibility he has left by trying to jawbone rates lower without the substance to back it up.
Takaichi’s government faces a parallel critique. Economist Richard Katz, who writes the Japan Economy Watch newsletter, calls her plan for 370 trillion yen (US$2.3 trillion) in investment across 17 sectors a “false solution” that doesn’t address Japan’s real problems: weak productivity and what he calls “anorexic consumption.”
Real household spending, he notes, is no higher today than it was 13 years ago, largely because wages have stagnated — which, in turn, limits any real incentive for businesses to invest.
The result is a self-reinforcing cycle. Katz calculates that cash flow across Japan’s roughly 900,000 corporations has climbed to 17% of GDP, while business investment has stayed flat at 8–10% of GDP — a gap of about 7% of GDP that companies simply aren’t putting back into the economy through wages, investment or taxes.
Japan’s political establishment has tried to paper over this gap with deficit spending for decades. Occasional attempts at fiscal discipline — under Junichiro Koizumi in the 2000s, or Shigeru Ishiba more recently — have never stuck, and the ruling party has consistently reverted to stimulus.
Until Japanese bond yields recently spiked, Takaichi was fully committed to a weak-yen strategy. And she hasn’t clearly abandoned it so much as been forced to improvise around it. The absence of any real alternative plan suggests the standoff between markets and policymakers is far from over.
What’s becoming clearer is that Bessent isn’t battling traders so much as the underlying economics he can’t bend. Japan’s political machinery still needs a soft currency, the BOJ is tightening only reluctantly, and the Fed is moving in the opposite direction entirely.
That’s why the standoff feels unresolved: the rhetoric keeps escalating while the structural pressures keep deepening. Markets have already delivered their verdict — and it’s Bessent, not the yen, that looks overextended.
Follow William Pesek on X at @WilliamPesek
