The yen plunged on Friday despite the most hawkish Bank of Japan meeting in living memory.

I know, I know: Who would’ve thunk it?! Not Scott Bessent, apparently.

When Bessent demanded rate hikes from Tokyo in exchange for Treasury’s assistance in shoring up the beleaguered yen, he had the right idea. For the intervention to work in a durable way, the fundamentals needed to shift meaningfully and in a hurry.

Despite a harrowing rise in Japanese yields, rate differentials still favored the dollar, the yen remained a low-yielder, rising oil prices were an albatross given Japan imports most of its energy and Sanae Takaichi, being a Shinzo Abe disciple, doesn’t exactly fit the bill when it comes to leaders from whom you’d expect fiscal consolidation.

But Bessent thought he could browbeat the BoJ into adopting a policy bent so hawkish that the yen couldn’t help but sustain the intervention rally which, by early September, had USDJPY down to a seven-month low.

He might’ve been right, but he kept talking about it. And every time he did, he set the bar higher for a hawkish surprise. As I warned on September 7, the yen was “at risk of a dramatic reversal in the event the [BoJ] hike isn’t big enough and/or the forward guidance not aggressive enough.”

USDJPY put in a low just hours after I penned those words. From there, the yen weakened more than 2% headed into Friday’s BoJ meeting at which the bank raised rates by a quarter point to a three-decade high. There were two dissenting votes. While not unexpected (both were Takaichi appointees), that watered down the hike the moment it was delivered.

The statement flagged persistent pressure on factory-gate prices from “the impact of the expansion in AI-related demand, in addition to high crude oil prices and the depreciation of the yen.” Upward pressure on “business-to-business transactions has started to spill over into consumer prices,” and the same’s true of wage increases as companies pass along the cost of higher pay, the bank said.

Both medium- and long-term inflation expectations “have continued to rise,” and with allowances for all manner of uncertainty, “there is a risk that [underlying inflation] will deviate upward to a level above the price stability target of 2%.” Financial conditions in Japan are accommodative, and will remain so after Friday’s hike, the statement went on.

The forward guidance was unequivocal, or as unequivocal as it could be considering the vagaries of the current macro-geostrategic environment. The BOJ “will continue to raise the policy rate and adjust the degree of monetary accommodation in response to developments in economic activity and prices as well as financial conditions,” the statement said.

In the post-decision press conference, Bessent…  wait, sorry, Kazuo Ueda, suggested we’re witnessing an epoch. He spoke of a “phase shift” in Japanese monetary policy. In this “new stage,” the bank will be proactive about raising rates to forestall inflation overshoots, lest policy should find itself behind the curve.

None of that was enough for the yen, which weakened the most since December.

There’s the chart. If you’re inclined to chuckle, I’m right there with you.

Despite a rate hike, a (literal) promise of more hikes to come and a governor talking up the merits of preemptive tightening, the currency was on track for its worst day of 2026.

Not to put too fine a point on it, but I told you this was likely to happen. As I wrote on September 2, “The bar for a hawkish surprise is now very high, and quite possibly too high for Ueda to clear.”

As the figure above shows, the yen was on track for its worst week in two years and its third worst week in a decade. And, so, here we are with dollar-yen eying 160 again, and authorities in Tokyo and Washington wondering what to do next.

In the event the yen continues to weaken and the finance ministry “has” to intervene again, that’ll raise the specter of UST sales (although as explained here, Japan doesn’t really “need” to liquidate its Treasurys to access dollar firepower). Bessent would presumably be inclined to forestall such an outcome with another US intervention.

Friday’s move in the yen is the latest example of the market making a mockery of Bessent’s “I am the house” declaration. How did Scott put it again? “I have pretty good insight into what the Bank of Japan’s gonna do and, um, you can bet against me if you want.”

“Um.”