When governments take on foreign exchange traders they tend to end up on the losing side. Few policymakers understand this better than U.S. Treasury Secretary Scott Bessent. As a hedge fund manager he helped George Soros force a devaluation of the pound in 1992. That makes his recent decision to help prop up the Japanese yen all the more puzzling. What’s clear, though, is that U.S. financial policy is becoming increasingly unpredictable.
Economists and traders have spent the past week puzzling over the unusual coordinated intervention, which included Bessent scribbling “Buy Japanese Yen” on a cabinet notepad. Though the Japanese government is keen to avoid a disorderly devaluation, Hudson Lockett points out that the currency’s slide is a rational response to Prime Minister Sanae Takaichi’s debt-fuelled investment splurge. Bessent added to the confusion by drawing a comparison with the Asian financial crisis of the late 1990s, when other regional currencies dropped against the U.S. dollar.
All this may be part of an emerging “Bessent doctrine”, where the United States opportunistically uses tools of economic and financial power to support friendly governments. Viewed through that prism, the Japanese intervention is in line with Bessent’s public support for Argentinian President Javier Milei, and the reported discussions about a dollar swap line for the United Arab Emirates at the height of the Iran war.
Help for Japan seems to come with a few more strings attached, however. Bessent explicitly voiced his support for Bank of Japan Governor Kazuo Ueda, adding to expectations that the central bank will soon raise interest rates. The U.S. appears less enthusiastic about Takaichi’s policies, which include a plan to lower the consumption tax on food. “You could have that, or you could try to get inflation down,” one senior U.S. official told Nikkei. “If it were me, I would try to get inflation down.”
Bessent has selfish reasons to reverse the yen’s slide. If Japan dumps its vast holdings of U.S. government debt to buy its own currency, yields on Treasury bonds will rise further. This helps explain why the U.S. sold euros to buy yen, and why Bessent is keen to expand a Covid-era emergency facility which allows overseas governments to temporarily swap U.S. government debt for dollars. Doing so would allow the Japanese authorities to raise more cash without selling Treasuries. Yet Gabriel Rubin argues that this represents another encroachment onto the Federal Reserve’s territory.
The intervention has reversed the yen’s slide for now. But only a change of policy will alter the long-term direction. Bessent can keep markets guessing. Still, he understands better than most that hedge fund managers will be looking for any opportunity to test his resolve.
TLT•
