Scott Bessent may have envisioned a triumphant return to the hedge fund world after his tenure as US Treasury secretary. But the homecoming is proving less glorious than he might have hoped, as markets increasingly ignore his pronouncements.
Bessent, who honed his skills under George Soros and Stanley Druckenmiller, has been leveraging that pedigree to project authority over markets. He has warned traders against pushing oil prices higher, driving up bond yields, or selling the yen, implying that his insider knowledge and government connections give him an edge. Yet the markets are not buying it.
Oil has climbed back above $100 a barrel. Treasury yields, despite a massive government buyback program intended to suppress them, are drifting toward multi-year highs near 4.85%, with 5% looking increasingly plausible. Nobel laureate Paul Krugman has noted that Bessent's efforts to talk down rates are failing "with flying colors."
The yen, meanwhile, has retreated from its highs, even as Bessent claims, somewhat bizarrely, that "I am the house now" regarding bets against the currency. That assertion would likely surprise Japan's Finance Minister Satsuki Katayama and Bank of Japan Governor Kazuo Ueda, and it is doing little for Bessent's credibility.
Japan's Currency Conundrum
This week's yen strength appears, on the surface, to be a turning point. The joint US-Japan intervention to prop up the currency—the first since 1998—has traders on edge. But the rally rests on shaky foundations.
First, a stronger yen runs counter to 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 battle is not with Tokyo but 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. Takaichi, a protégé of the late Shinzo Abe, has followed that script aggressively since taking office last October, cutting taxes, ramping up spending, and dismissing the case for higher rates as "stupid."
Reality is intervening nonetheless. Bond vigilantes have pushed 10-year Japanese government yields to 3%, a three-decade high, and even Takaichi's allies are warming to the idea that rates must rise. The weakest yen in 40 years has driven up import costs and inflation, forcing the issue.
The BOJ is widely expected to raise its benchmark rate by a quarter point, to 1.25%, at its September 18 meeting. "A September BoJ rate hike is now near-consensus," 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, further complicating Bessent's narrative.
As bond markets tighten on both sides of the Pacific, Bessent's bravado is colliding with fiscal and monetary realities. His bond buyback strategy echoes Japan's debt trap, and his market stress signals deeper global fiscal strains. Whether he can navigate these currents remains to be seen, but for now, the markets are writing their own story.
