Trump Crashing The Dollar Is Wrecking Japan's 2025, Too

Forbes

23-04-2025

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For 20-plus years now, U.S. officials have been prodding Japan to engineer a stronger yen. It never occurred to Tokyo, though, that Washington might be willing to crash the dollar to do it.
Three months into the Donald Trump 2.0 presidency, the administration's trade war, policy chaos and general dysfunction have investors fleeing the dollar. A 'Trump trade' gone bad has the dollar down nearly 10% versus the yen and euro.
Adding to the disorientation, the plunge appears to be by design. President Trump's team believes a weaker exchange rate will offset the effects of the tariffs. That, and the Federal Reserve slashing rates.
But count the ways Trump's efforts to sabotage the global reserve currency are backfiring. The resulting turmoil in stock and bond markets has triggered a sell-America dynamic in global markets, one taking on a life of its own.
The disorder is also upending Japan's year in unpredictable ways. For one thing, Trump's tariffs have markets betting on stagflation in Asia's second-biggest economy. These taxes on goods will both reduce demand for Japanese exports and boost global inflation.
This has the Bank of Japan stepping away from plans to tighten next week. For 24 months now, BOJ Governor Kazuo Ueda has been plotting an escape from 25 years of zero interest rates and quantitative easing. And succeeding.
In July 2024, Team Ueda managed to get the benchmark rate to 0.25%. In January, the BOJ reached a 17-year high of 0.5%. At its April 30-May 1 policy meeting, the BOJ was widely expected to boost rates to 0.75%.
Yet Trump's one-man tariff arms race will keep the BOJ on hold. What's more, the collateral damage from his 145% tax on China, 25% levy on the auto industry and tariffs on steel and aluminium may push Japanese rates back to zero. The yen's surge, thanks to a cratering dollar, could devastate corporate profits, deepening losses for a Nikkei 225 Stock Average down nearly 12% this year.
Here, it's wise to look past Team Trump's efforts at soothing world markets. The odds of this White House throttling back on China tariffs in the long run isn't great.
All this depends on the good cop/bad cop act playing out in Trump World. The good cop — Treasury Secretary Scott Bessent — is having a decent week versus bad cop Peter Navarro. But officials here in Asia fear that trade advisor Navarro will have the upper hand in the long run.
It's a valid worry, considering Trump's longest-held economic views. A fundamental one is his 1980s-drenched belief that Asia is stealing U.S. jobs, wealth and America's future and must be stopped.
Forty years ago, Japan was the great economic evil that had, in Trump's words, 'systematically sucked the blood out of America' and 'gotten away with murder.' At the time, Japan Inc. was buying up New York's Rockefeller Center, famed golf courses like California's Pebble Beach and Hollywood studios. CEOs were buying up virtually every Monet, Picasso and Warhol on auction to hang in Tokyo.
Of course, Trump was dead wrong about Japan 'winning the war' of economic domination. A quarter century of deflation saw Japan turn inward. But Trump's current Asia obsession — China — has the scale to dominate the next 40 years in ways Japan never really did.
And Trump is making it easier for China to spread its economic wings. His efforts to sabotage the dollar are Exhibit A for why Chinese leader Xi Jinping isn't as unhappy about Trump's trade war as you might think.
No, Xi's Communist Party isn't enjoying Trump raising tariffs on China again and again like some manic auctioneer. But Beijing understands that the U.S. can't sideline its giant, rapidly growing economy without strong allies working in lockstep around the globe. Instead, Trump is isolating the U.S.
The U.S., remember, is only China's third biggest market after Southeast Asia and Europe. Rather than forging a coalition against China, Trump is losing American allies left and right. And enabling China to position itself as the more stable and reliable partner.
The catch is the dollar. The dollar and U.S. Treasury securities are the central nervous system of global trade and finance. An American president who trashes trust in both is doing China's bidding by making non-dollar currencies look more appealing. That includes the Chinese yuan, for which Xi has grand designs to be the reserve currency of the future.
International Monetary Fund Chief Economist Pierre-Olivier Gourinchas speaks for many when he says the global economy is being "severely tested' by the Trump 2.0 trade war. The global economy "still bears significant scars" from the "severe shocks of the past four years,' Gourinchas told reporters Tuesday. Now the tariffs have "jettisoned our projections.'
The IMF slashed its global growth forecast this year to 2.8% from 3.3%. This would be the worst performance since the start of Covid 19 pandemic in 2020 and the second worst since 2009 following the Lehman Brothers crisis. It's hard to dismiss the IMF's figures as JPMorgan, Goldman Sachs and other Wall Street titans talk about U.S. recession.
The Institute of International Finance thinks the U.S. will shrink an annualized 0.8% in the third quarter and 0.3% in the fourth. Far more disturbing, though, is the self-inflicted nature of this downturn. IIF points to 'intensifying policy-driven uncertainty across trade, inflation, and growth.'
How this endears the U.S. to friends or foes alike is anyone's guess. Least of all Japan, the best friend the Trump 1.0 era had anywhere. But as Trump trashes the dollar, export-reliant Japan is uniquely vulnerable to the fallout.