Why Targeting the Yen Could Backfire in US-Japan Trade Talks

Image Credit: Reuetrs

U.S. President Donald Trump's push for a stronger yen against the dollar is expected to play a significant role in ongoing trade talks with Japan in Washington. However, analysts warn that attempting to influence currency values could lead to complications for both sides.

The talks began on Wednesday, with Japan’s chief negotiator, economy minister Ryosei Akazawa, meeting U.S. Treasury Secretary Scott Bessent and Trade Representative Jamieson. Trump made a surprise appearance, reinforcing the importance of addressing exchange rates. Last month, Trump accused Japan of devaluing the yen to gain an unfair trade advantage.

While yen-related discussions weren’t part of Wednesday’s talks, Akazawa indicated that currency matters will be addressed by Japan’s Finance Minister Katsunobu Kato, who is scheduled to meet with Bessent next week during the IMF and World Bank meetings.

Analysts caution that any agreement on currency adjustments is challenging. Pressuring Japan to accelerate rate hikes could push up the yen but risk derailing Japan's economic recovery and interfere with central bank independence. Alternatively, Japan could sell U.S. dollars for yen, but this would require pulling billions of dollars out of U.S. debt at a time when financial markets are fragile.

Citigroup views Japan as a potential target if the Trump administration seeks a coordinated devaluation of the dollar, an idea referred to as the "Mar-a-Lago Accord." However, Citigroup’s Osamu Takashima notes that such a scenario is not an immediate concern.

The U.S. is Japan’s largest export market, with automobiles accounting for around 28% of its exports to the U.S. The recent 25% tariff on cars imposed by Trump has caused a 6% drop in the Nikkei index since its announcement in late March.

While Akazawa didn’t provide details on the talks, he mentioned that Trump emphasized making a deal with Japan a "top priority."

The yen has already strengthened from its lows against the dollar. Last year, the dollar was worth nearly 162 yen, but recently the dollar dipped below 142 yen, driven by concerns that Trump's tariff policies could trigger a U.S. recession. Speculative bets on further yen strength have surged to record highs.

Trump and Bessent need to consider the current economic landscape before pressing for a weaker dollar. Unlike the 1985 Plaza Accord, when the dollar’s devaluation was coordinated with several countries, today the U.S. holds $15 trillion in government debt, making any drastic move on the dollar a risky proposition. Despite some recent stability in Treasury markets, investor sentiment remains fragile.

Nomura’s Yunosuke Ikeda warns that advocating for a weaker dollar could be dangerous, especially given that the Treasury Secretary is responsible for promoting U.S. Treasury debt, a crucial asset in global markets.

While Japan would like a stronger yen, authorities are focused on improving industrial competitiveness rather than quick fixes for currency issues. Additionally, the Bank of Japan cannot be pressured into hastening rate hikes due to domestic concerns about rising costs and upcoming elections. The Japanese government maintains that the BOJ operates independently and is not attempting to manipulate the currency.

 

 

 

 

 

 

Paraphrasing text from "Reuters" all rights reserved by the original author