Japan rate hike came after pressure from US Treasury chief, markets

The Bank of Japan's (BOJ) latest rate hike was driven partly by pressure from US Treasury Secretary Scott Bessent and financial markets, despite Japanese Prime Minister Sanae Takaichi's initial caution toward monetary tightening, Nikkei Asia reported.

The BOJ on Tuesday raised its policy interest rate to 1%, the highest level since 1995, as persistent inflation pressures and a weaker yen increased pressure on policymakers.

Bessent urged Japanese officials to raise interest rates sooner rather than later to avoid larger future increases and possible economic and financial disruptions, Nikkei Asia said, citing multiple Japanese government officials.

During a May 11 visit to Japan, Bessent told Japanese Finance Minister Satsuki Katayama that an earlier rate hike would be preferable because delayed action could force the BOJ into sharper tightening later, potentially damaging the economy and markets, according to the report.

Bessent later met BOJ Governor Kazuo Ueda in Paris on the sidelines of an international conference. After the meeting, he said on the US social media firm X that he was confident Ueda would "successfully guide Japan's monetary policy."

A senior Japanese Finance Ministry official interpreted the message as a push for the BOJ to act, given what was seen as reluctance to raise rates, Nikkei Asia reported.

The report said Washington's pressure was not only a matter of concern for Japan. Bessent has also expressed unease that rising Japanese long-term yields, driven by inflation concerns, could pull investment funds back to Japan, lead to sales of US Treasuries and push US interest rates higher.

The Japanese government's stance reportedly began to shift after Takaichi met Ueda on May 22, their first meeting in three months. Ueda said afterward that they had "a constructive exchange of views on various aspects."

Following the meeting, the BOJ started preparing for a rate hike at its June policy meeting, according to Nikkei Asia.

At the previous meeting in late April, the conflict in the Middle East had fueled concerns about the economic outlook, prompting many in the prime minister's office to argue for caution on rate hikes.

But around the time of the Takaichi-Ueda meeting, some officials began to accept the possibility of a rate increase in light of global monetary policy trends, the report said.

Central banks globally have increasingly refocused on inflation control. The European Central Bank recently raised rates for the first time in about three years, while more Federal Reserve officials have discussed the possibility of rate hikes.

The report said the BOJ's decision was largely driven by two external pressures: financial markets and Washington.

US research firm SGH Macro Advisors described Bessent as the new "shadow governor" of the BOJ, a view also echoed by some overseas market participants, according to the report.

Still, the underlying structure of Japan's monetary policy debate remains unchanged, Nikkei Asia said, with the government cautious about higher rates and the BOJ continuing to factor in that stance.

Economic and Fiscal Policy Minister Minoru Kiuchi said at the BOJ policy meeting that he expected accountability from the central bank, while acknowledging the impact of higher rates on corporate and household financing.

The government viewed the BOJ's decision to halt reductions in government bond purchases from next spring as a positive outcome, the report said.

With markets already pricing in further tightening, the path of future BOJ policy remains uncertain, while persistent inflation and yen weakness continue to test Japan's ability to manage monetary policy without relying on external pressure.