U.S. Treasury Secretary Scott Bessent delivered an unusually direct critique of the Bank of Japan on Thursday, warning that the central bank is “behind the curve” on tackling inflation and will need to raise interest rates. Speaking to Bloomberg TV, Bessent argued that Japan’s inflation problem requires a policy response, contrasting with BoJ Governor Kazuo Ueda’s more cautious stance. The remarks add to long-standing U.S. pressure on Japan to tighten policy, in hopes of strengthening the yen and rebalancing bilateral trade.

The BoJ has kept rates at 0.5% despite core inflation running above its 2% target for over three years, driven in part by higher food prices. Ueda insists the bank is not behind the curve, preferring to wait for sustained wage growth before further tightening. Economists note that wage growth remains stuck between 2–3%, trailing inflation of 3–4% since mid-2022. Following Bessent’s comments, market pricing for a September hike ticked up, though traders still see October or January as more likely. Japanese government bond yields climbed, the yen strengthened 0.6% to ¥146.5 per dollar, and the Topix fell 1.1% after hitting a record high. Analysts say the response reflects growing expectations of a narrowing rate differential between the U.S. and Japan. While Bessent called for a more aggressive BoJ, he also urged the Fed to cut rates by up to 0.5 percentage points next month.

Bessent recently drew attention by suggesting the Federal Reserve lower its benchmark rate by 150–175 basis points, beginning with a 50-point cut in September. He based this view on various economic models, which he says point to a lower neutral rate—especially after recent labor market revisions showed weaker payroll growth than previously reported. Bessent has emphasized that he is not formally advocating for cuts, but rather presenting what these models imply.

His remarks broke with convention, as Treasury secretaries typically avoid commenting on future Fed policy. The comments stirred reactions across financial media and markets: CNBC’s Fast Money traders debated the potential impact of sharply lower rates on equities and bonds, while Bloomberg and others questioned his assumptions, noting the Fed has rarely set rates as low as he suggests while inflation remains above 3%.

A quick plug for our friend High Yield Harry - he has a Buy-side Job Board and Compensation Analytics Platform with thousands of Private Equity, Private Credit, Hedge Fund, and Asset Management comp datapoints. He’s also running an Investment Banking Bonus Season Compensation Survey you can contribute below. Sign up so you can access the compensation reports.

The Japanese yen strengthened for a third straight day on Thursday, touching a fresh three-week high against the U.S. dollar as markets continued to price in the prospect of a Bank of Japan rate hike later this year. The BoJ’s upward revision to its inflation forecast in July — paired with signals it may tighten policy if growth and prices track estimates — stands in sharp contrast to expectations that the Federal Reserve will begin cutting rates in September. This divergence in policy outlook has fueled flows toward the lower-yielding but increasingly hawkish yen, even as broader markets lean risk-on.

While the yen’s momentum remains strong, some headwinds are emerging. Concerns over Japan’s consumption-led recovery, political uncertainty, and the economic impact of higher U.S. tariffs could temper BoJ tightening expectations. Recent data showed real wages falling for a sixth consecutive month in June, and a slowdown in corporate goods price growth has further clouded the domestic demand outlook. Still, the yen continues to benefit from a softer U.S. dollar, which remains near its lowest levels in over two weeks after weak labor data and muted inflation readings reinforced Fed cut bets.

According to FX Street the USD/JPY’s drop below the 200-period SMA near 147.00 is viewed as a fresh bearish trigger, with downside targets eyed at sub-146.00 and potentially 145.30–145.00. Any intraday rebounds are likely to face resistance around 147.00, with sellers ready to defend that level. Traders now turn to the U.S. Producer Price Index and upcoming Japanese GDP data for cues, but for now, the macro backdrop still tilts in favour of yen strength and a deeper correction in USD/JPY. The market move reflects expectations of an upcoming BOJ rate hike and has triggered the unwinding of carry trades (see our very first edition which covered the Japanese Yen Carry Trade) , with global investors rebalancing away from dollar-centric assets and into Japanese bonds. Japanese 10-year bond yields rose to 1.2%, their highest since 2015, as the yen has surged since the beginning of the current rate cycle.

The Bank of Japan has maintained a cautious yet gradually optimistic approach to monetary policy throughout 2025. At its July meeting, the BOJ kept the policy rate unchanged at 0.5%, aiming to balance gradual normalization with ongoing economic uncertainties. This followed a 25-basis-point hike in January—the largest since 2008. The central bank also revised its core inflation forecast for fiscal 2025 upward to 2.7%, driven by strong wage growth and rising food prices, particularly rice. Inflation is expected to moderate to around 1.8% in 2026, while GDP growth for 2025 was slightly raised to 0.6%.

Boj communications have signalled openness to further rate hikes later in the year. Governor Kazuo Ueda emphasized that any adjustments will be data-dependent, contingent on sustained improvements in underlying inflation and wage growth. The bank’s risk assessment has shifted from being “skewed to the downside” to a more balanced outlook, even as global trade concerns—especially with the U.S.—continue to influence policy decisions.

The Yen held a firm bid against a broadly weaker dollar, pushing USD/JPY to the 147.00 mark during the early European session on Friday according to FX Street. Data released earlier showed Japan’s economy grew more than expected in the second quarter, despite U.S. tariff headwinds. Preliminary data from Japan’s Cabinet Office on Friday showed the economy grew 0.3% in the second quarter of 2025. On an annualized basis, GDP expanded 1.0% during the April–June period, beating expectations for a 0.4% increase and reversing the 0.2% contraction in the first quarter. This reinforces expectations that the Bank of Japan will continue its policy normalization, providing fresh support to the JPY.

The Bank of Japan’s relatively hawkish stance contrasts sharply with other major central banks, including the Federal Reserve, which is expected to resume rate cuts in September as previously mentioned. This divergence limits the USD’s ability to build on Thursday’s U.S. Producer Price Index-driven rebound, drawing additional flows into the lower-yielding JPY, which remains resilient despite the prevailing risk-on mood.

Congratulations on making it to the end, while you’re here enjoy these other newsletters and be sure to subscribe to The Triumvirate before you go.

Some of the charts in our weekly editions are created using Datawrapper, a tool we use to present data clearly and effectively. It helps us ensure that the visuals you see are accurate and easy to understand. The data for all our published charts is available through Datawrapper and can be accessed upon request.

Our new website for The Triumvirate is now live! You can browse all past issues from our first year, featuring over 40 editions covering commodities, currencies, and central banks.