FX alert: The return of the Yen

The yen’s quiet comeback isn’t about intervention threats (well, partly, if you include verbal) or yield differentials (but they will soon be narrowing)—it’s about a memo, not a mandate. Scott Bessent’s words landed like a policy note slipped across the table, written in the kind of careful language that moves markets without ever saying so directly. His message to Prime Minister Takaichi was deceptively simple: give the Bank of Japan room to act—room to anchor inflation expectations, to operate independently, to stop treating the currency as collateral damage in the name of stability.

Markets read between the lines instantly. The yen rose from 152.12 to 151.54 within minutes of Bessent’s post—not because traders expected an imminent hike, but because they recognized the memo’s intent. Yen carry traders suddenly felt a tremor of policy reality.

Bessent’s tone mattered. It wasn’t Washington dictating terms; it was Washington acknowledging Tokyo’s next move. His meeting with Finance Minister Satsuki Katayama two days earlier had already signalled coordination. The Treasury’s readout, stressing “sound monetary policy formulation and communication,” was diplomatic code for: normalize carefully, but normalize nonetheless. The message was clear—Japan’s balance sheet can no longer afford the distortions of ultra-low rates, and the global system can no longer run on the assumption that the yen will always absorb excess liquidity.

This dovetails perfectly with what I’ve been arguing. Last week, in the middle of the carry frenzy, I said the market was missing the real story—that Japan doesn’t need a weak yen to prosper. The Takaichi renaissance depends on credibility, not currency suppression. A stronger yen helps finance Japan’s own industrial and fiscal renewal by pulling capital home, anchoring inflation, and strengthening domestic balance sheets.

Think of this as the repatriation phase of Japan’s reboot. The GPIF, the lifers, the megabanks—they should all feel the gravitational pull of higher domestic returns with no hedging costs. Even Japanese retail, once the backbone of offshore yield-chasing, is beginning to eye its home field again. The carry traders, for now, still see the surface calm, but the undercurrent has changed direction to other low-yielding funders.

The BOJ doesn’t have to move tomorrow. The market just needed permission to imagine a world where it can. Bessent’s memo note gave it exactly that—a nudge toward reality dressed up as diplomatic civility. It’s the kind of subtle intervention that doesn’t show up on Bloomberg terminals but reshapes the forward curve all the same.

We’re entering a phase where the yen is no longer a symptom of policy distortion but the instrument of its correction. The old reflex—weak yen, strong Nikkei—is giving way to a more complex equilibrium. Tokyo equities are thriving not because of cheap currency, but because Japan’s fiscal and monetary alignment is finally maturing.

This is what traders miss when they treat USD/JPY as a carry spreadsheet instead of a living organism. Policy isn’t static. It breathes, adjusts, and now, it’s being allowed to flex again. The yen is no longer the market’s liquidity sponge—it’s becoming its pressure valve.

Call it what it is: the memo from Washington has turned into the first line of Japan’s next chapter. A policy note written in ink, not fire—but powerful enough to rewire the entire yen narrative.