How Bessent, America's bond salesman, cornered Japan on big spending

By Tamiyuki Kihara, Makiko Yamazaki, Takaya Yamaguchi and Leika Kihara

TOKYO, Sept 18 (Reuters) - When Japanese finance minister Satsuki Katayama called Scott Bessent for help to support the cratering yen in June, her U.S. counterpart's response was familiar: If Tokyo wanted assistance, it had to get its fiscal house in order.

For months, Treasury Secretary Bessent had told Katayama and other officials privately that Japan should rein in its massive fiscal spending and that its central bank needed to raise interest rates, according to three people familiar with the situation.

The Japanese worried that inflation stoked by the weaker ‌yen would hurt Prime Minister Sanae Takaichi with voters. Bessent was more concerned that a sell-off in Japanese bonds could spill over to U.S. debt, the people said. Katayama's call for Washington's help in a coordinated yen-buying spree enabled Bessent to press his case.

He urged Japan to first address fundamental factors ‌driving down the yen — a reference to Takaichi's big spending plans — and avoid any "inconsistency" between monetary and fiscal policies, two of the people said. In short: overhaul the policies that counter the Bank of Japan's fight against inflation.

The June 22 call, the details of which haven't been previously reported, helped set the stage for massive joint intervention by Washington and Tokyo in late July, according to the people, who spoke on ​the condition of anonymity.

This account of the interactions between Japan and the U.S. shows how Bessent used Washington's leverage over currency and Treasury markets to extract policy concessions from a key ally — forcing Takaichi to navigate the competing demands of voters and her most important security partner.

"Bessent has run out of patience with Japan," said David Boling, managing director for Japan at The Asia Group, a consultancy. The U.S., he said, wants a stronger, more stable yen, less risk of Japanese selling of Treasuries, and policy that looks more credible to markets on inflation and fiscal stability.

Japan's Ministry of Finance and Takaichi's office declined to comment. The BOJ didn't respond to a request for comment.

A U.S. Treasury spokesperson declined to comment on specific private discussions with Japanese officials. Separately, a Treasury official told Reuters "monetary-policy decisions are for Japanese authorities to make" and that "U.S. interest in orderly yen markets is not about targeting a particular exchange rate."

A sharp rise in Japan's long-term yields would risk pushing up U.S. borrowing costs, given Japan is the largest foreign holder of Treasuries. For Bessent, who styles himself as "America's ‌leading bond salesman," that would be an unwelcome development as Washington grapples with its own swelling deficit.