Bezent said, “I am the bookmaker”! Expectations of the Bank of Japan's interest rate hike have risen sharply, and the yen's rise is at risk of falling short of expectations

The Zhitong Finance App learned that US Treasury Secretary Basent has recently continued to publicly pressure Japan to tighten monetary policy and has frequently released strong signals supporting the yen, which is rapidly boosting market expectations about the Bank of Japan's future interest rate hike path. As investors have almost completely bet that the Bank of Japan will raise interest rates by 25 basis points next week, some market participants have even begun discussing the possibility of raising interest rates by 50 basis points at once or continuously. Analysts warned that if the hawkish signals finally released by the Bank of Japan do not meet market expectations that have already been raised sharply, the yen's recent gains may reverse rapidly and bring new fluctuations to global financial markets.

Bessent further strengthened that expectation at an event at Southern Methodist University in Texas on Tuesday. The US Treasury Secretary, who has been trading hedge funds for a long time, claims that he has “asymmetric information” about the Bank of Japan's next move and uses the language of the trading market to claim that he is now a “bookmaker.”

Besant not only talked about the Bank of Japan, but also hinted that he understood the next actions of Japanese policy makers. Although he did not specify what specific measures he wanted the Bank of Japan to take, only last week did he publicly urge Japanese officials to “do the right thing” on interest rates.

This series of statements further heated the market's attention to the Bank of Japan's September meeting. Currently, the market has taken into account expectations that the Bank of Japan will raise interest rates by 25 basis points next week, so the real impact on the market is not just “whether to raise interest rates,” but whether Bank of Japan Governor Kazuo Ueda will send a strong enough signal, suggesting that the normalization of monetary policy will be further accelerated in the future.

Seisaku Kameda, executive economist at Sompo Institute Plus and former chief economist at the Bank of Japan, said Beisaku Kameda has pushed market expectations “too far.” Some investors have even begun to bet that the Bank of Japan may raise interest rates by 50 basis points at once, or implement continuous rate hikes.

Kameda believes that these expectations are already excessive and may require downward revisions in the future. Once the Bank of Japan's actual actions fall short of the market's current high expectations, there is a risk that the yen will weaken again.

If the Bank of Japan raises interest rates again next week, this will mean that it will implement a total of three interest rate hikes in 12 months, making it the fastest monetary tightening cycle in more than 30 years. Although Bank of Japan officials have previously suggested that the interval between rate hikes in the future may be shorter than the pace of about once every six months in the past, policymakers still want to remain flexible enough and are unwilling to promise a fixed rate hike path ahead of time.

This also left Ueda and Kazuo facing an increasingly delicate policy balance. On the one hand, Japanese Prime Minister Sanae Takaichi has been cautious about raising interest rates too quickly and has promoted large-scale fiscal spending plans. Lower financing costs are clearly more beneficial to this policy direction; on the other hand, Beisent continues to publicly demand that Japan raise interest rates, so that Tokyo must also consider policy coordination with the US.

Bezent's high level of involvement in Japan's monetary policy did not come out of nowhere. Japan is still the largest overseas holder of US treasury bonds, and narrowing the spread between the US and Japan and preventing further depreciation of the yen has also become a matter of repeated concern for Bezent in recent months.

At the end of July this year, Bezent also coordinated with Japan's Finance Minister Katayama Satsuki to implement the first joint intervention in the foreign exchange market since 1998 to jointly buy yen to prevent the yen from continuing to depreciate after falling to a low point of about 40 years.

However, judging from actual investment, the scale of direct US intervention is relatively limited. According to estimates by Brad Setser, a former US Treasury official, the actual capital invested by the US at the time was probably only about 500 million US dollars, which is significantly lower than the 5 billion to 10 billion yen purchase plan that Bezent previously showed to reporters. In contrast, Japan has recently invested a total of about 96 billion US dollars in actions to stabilize the yen, setting a record.

What really had an obvious impact was Bezent's continuous verbal intervention since then. Since the joint action between the US and Japan, he has repeatedly publicly warned investors not to bet on the fall of the yen, and has continuously strengthened the view that Japan needs to raise interest rates.

Driven by this series of remarks, the yen has recently risen above 154 yen to the US dollar, even breaking through levels previously unattainable during the joint intervention of the US and Japan. In early trading in New York on Wednesday, the yen traded at around 153.16 yen to the US dollar.

From the perspective of the Bank of Japan, Bezent's statement is not entirely negative. Harumi Taguchi, chief economist at S&P Global Markets Finance Intelligence, believes that the Bank of Japan may actually be happy to see these remarks because the central bank itself wants to steadily advance monetary policy normalization, and pressure from the US will help Japan to further develop a consensus supporting normalization.

But the problem is that Bezent's “verbal intervention” may have been too successful.

As the yen appreciates rapidly and the market continues to raise expectations for interest rate hikes by the Bank of Japan, **carry trade (carry trade) **, which has long been based on Japan's ultra-low interest rates, faces the risk of closing positions again. This type of transaction usually involves borrowing yen at a low cost and then investing in higher-yielding assets in overseas markets such as the US. This strategy is particularly profitable when the yen continues to depreciate; however, once the yen appreciates rapidly, the transaction may quickly reverse.

Similar risks were already present in 2024. At the time, the Bank of Japan tightened its policy, which exceeded the expectations of some investors, triggering the rapid cancellation of global arbitrage transactions. The Japanese stock market fluctuated violently. The Nikkei Index plummeted 12.4% in a single day during the period of peak market volatility, the biggest one-day percentage decline since “Black Monday” in 1987.

Taro Kimura, a senior Japanese economist at Bloomberg Economic Research, pointed out that yen arbitrage trading performed particularly well when the yen fell, but once the yen rose, a very sharp reversal could also occur. He warned that when Bezent was so directly involved in the Bank of Japan's policy expectations, he was actually “playing with fire.”

The risks facing next week's BOJ meeting have changed. The market not only requires the central bank to raise interest rates by 25 basis points, but is also beginning to look forward to a faster and more aggressive path of further austerity. After Bezent continued to raise market expectations, even if the Bank of Japan raised interest rates as scheduled, it might not be enough to satisfy investors. If Kazuo Ueda does not send a clear signal of further continuous interest rate hikes, the yen may be under pressure again due to falling short expectations; and if the central bank acts too hawkish, it may also push the yen to appreciate rapidly and trigger centralized liquidation of arbitrage transactions, thus further transmitting the impact of Japan's monetary policy to the global equity and bond exchange market.