Pressure from the United States on Japan is beginning. Scott Bessent, the US Treasury secretary who spearheaded a historic intervention to support the value of the yen, explicitly referred to information the market does not have and said he believes Tokyo will do the right thing to safeguard the yen’s value and the Japanese sovereign debt market. The news, however, did not help yields, which on the secondary market reached levels not seen since at least 1996.

Doing the right thing, translated into simpler terms, means that Washington expects benchmark interest rates to be raised at the first available opportunity. Japanese authorities have already played down the pressure, but this will nevertheless be the climate as September approaches—a month that could potentially prove explosive.

Rates, Yen, Yields: Japan Remains the Great Sick Man

It seems a little like a race to point out who is worse off than we are. While international markets are focused on the performance of US debt—both because of its size and the yields demanded by markets—Scott Bessent, speaking at the G20, made bombshell statements that markets have not yet priced in.

“I know something the markets don’t know.”

“I know something the markets don’t know.”

This opening part of Scott Bessent’s remarks, as reported by CNBC, referred to the domestic situation. The US Treasury secretary had been the target of scathing criticism following his announcement of a doubling of the long-term debt buyback plan. Bessent also took the opportunity to settle a few scores. He accused his mentor, Stanley Druckenmiller, of attacking the move by the US Treasury because he had lost money.

The reference is to this editorial by the legendary investor, in which he accuses the Treasury of intervening in the markets without considering the consequences.

Beyond these statements, however, what made the rounds online and in the print media was what Scott Bessent said about the situation in Japan. The US Treasury secretary said he expects Japan to do the right thing—that is, for Japan to raise interest rates at the first available opportunity.

This would provide significant support for the US: for a while, fears that Japan might sell some of the enormous amount of US public debt it holds on the market in order to support the yen would ease. An interest-rate increase that markets have not yet fully priced in would be sufficient to produce the same effect.

The Question of Who Pays Whom

The problem is something else: by selling US bonds, Japan would make the United States indirectly pay for support of the yen. Among other things, such a sale would come at a time of considerable difficulty for the US bond market.

By raising rates, Japan itself would directly pay for the so-called support of the yen. This is because the effects of higher rates would ultimately impact, at least initially, the Japanese economy.

To spare Japan such an “easy” choice, the US Treasury has activated channels for potential support of the yen that would allow Tokyo to access liquidity without disrupting the bond market. Now, however, another kind of message is arriving: the problem is yours and… you will have to solve it yourselves.