Japan’s currency tightrope with Trump
The late Shinzo Abe (L) and Sanae Takaichi (R) at a science and technology innovation conference in Tokyo on October 22, 2014.
Toshifumi Kitamura | Afp | Getty Images
US President Donald Trump has accused Japan of “unfair trade practices” for years; This criticism dates back to his days as a real estate mogul.
In March, Trump singled out Japan once again, claiming Tokyo was weakening its currency to gain an unfair trade advantage. “I called the leaders of Japan to tell them that you cannot continue to debase and break your currency,” he said.
Then Prime Minister Shigeru Ishiba It is said that Japan’s parliament declared that the country was not pursuing a so-called “currency devaluation policy”; It was a point his predecessors, including the late Shinzo Abe, emphasized in their meetings with Trump.
Now, as Abe protégé Sanae Takaichi prepares to lead the world’s fourth-largest economy, that same concern may be rearing its ugly head again.
Takaichi has been widely labeled as the apostle of “Abenomics,” Abe’s economic strategy that embraces loose monetary policy, fiscal spending and structural reforms.
Last year, during the leadership race of the ruling Liberal Democratic Party, he criticized the Bank of Japan’s plan to raise interest rates and thereby strengthen the yen.
Markets responded with the so-called “Takaichi trade” and Nikkei 225 It will reach record levels and the yen will weaken to above 150 against the dollar.
The 150 yen level is psychologically and politically sensitive. Japanese officials have previously warned or intervened in foreign exchange markets when the yen exceeds this point because it would increase import costs and worsen cost-of-living shortages for households.
The weak yen also revives one of Trump’s favorite talking points: Japan benefiting from an undervalued currency at the expense of the United States.
However, analysts say Takaichi will be careful in his economic policies to avoid straining relations with Washington.
Sumitomo Mitsui Banking Corporation’s Chief Foreign Exchange Strategist Hirofumi Suzuki stated that the exchange rate between the US dollar and the yen has been largely intermittent since the beginning of the year, and that the yen has not experienced a downward decline.
“Although the so-called ‘Takaichi trade’ is currently trending towards yen weakness in the early stages, it is not expected to last more than about a month and is considered temporary at this stage,” he said.
Suzuki added that no impact on relations is expected for now. However, he said that if the weakness in the yen continues in the medium and long term, US-Japan trade relations can be expected to be affected.
Takahide Kiuchi, a former policy board member of the Bank of Japan, believes the Trump administration is already wary of yen weakness.
“While I don’t believe this will invalidate the Japan-U.S. agreement, it is possible that the Trump administration will ask Japan to correct the yen’s weakness,” said Kiuchi, managing economist at Nomura Research Institute.
money rope
While a weak yen is great for exporters, which make up a large portion of the Nikkei 225 and are a key driver of Japan’s GDP growth, it also raises import prices and could increase import inflation in the country.
Last year, Japan’s currency fell to a 34-year low Despite repeated interventions by the authorities, the dollar became 161.96. Before Takaichi won the LDP presidency, the yen had strengthened nearly 6% against the dollar since the beginning of the year to 147.44. It has since fallen to 152 on Thursday, narrowing its year-to-date gain to 2.77%.
Norihiko Yamaguchi, Chief Japan Economist at Oxford Economics, said concerns about imported inflation would keep Takaichi from enacting policies that would cause the yen to fall.
That’s why he thinks the future prime minister should be “more realistic” in his policy stance.
Despite Takaichi’s opposition to rate hikes, Yamaguchi expects the BOJ to raise rates once in December and again in mid-2026, and market pressures, particularly the weakening of the yen, will leave him no choice but to accept some rate hikes.
It has been above the BOJ’s 2 percent target for 3 consecutive years, experts told CNBC that this is because interest rate hikes will be needed to stop inflation. Japan’s last headline inflation figure for August was 2.7%.
“Inflation will decide in 12 months whether he has a job or not,” said its author, William Pesek. Japanification: What Can the World Learn from Japan’s Lost Decades?he told CNBC’s “Squawk Box Asia” on Monday.
Jesper Koll, senior manager at Monex Group, agreed with Takaichi, saying that he would eventually need a stronger yen to reduce inflation. “[The] “The loss of people’s purchasing power is the number one reason why the LDP is unpopular.”
