Why the yen is the wrong gambit in any US-Japan trade dispute

Zawya

18-04-2025

TOKYO - U.S. President Donald Trump's desire for a stronger yen against the dollar is almost certain to figure into trade negotiations with Japan underway in Washington, but analysts say any effort to shift the currencies is fraught with risks for both sides. Japan's chief negotiator, economy minister Ryosei Akazawa, got talks started on Wednesday by meeting with U.S. Treasury Secretary Scott Bessent and Trade Representative Jamieson, with Trump also making a surprise appearance.
The White House put the exchange rate unequivocally on the agenda after Trump last month accused Tokyo of pursuing a policy to devalue the yen, giving the Japanese an unfair trade advantage.
The yen didn't figure into Wednesday's negotiations, Akazawa said, but currency issues are more naturally a discussion for Finance Minister Katsunobu Kato, who will have his own round of talks with Bessent when he arrives in Washington next week for International Monetary Fund and World Bank meetings.
Analysts warn that any deal on where the dollar should trade versus the yen is inherently tricky.
An attempt by Tokyo to force the Bank of Japan into speeding up rate hikes could push up the yen, but risks snuffing out Japan's fledgling economic recovery and tramples on the idea of central bank independence.
Japanese officials could also sell U.S. dollars for yen, but that would mean pulling out billions of dollars it has invested in U.S. debt at a time when markets are particularly fragile.
Citigroup sees Japan as a prime target in the event that the Trump administration takes aim at a coordinated devaluation of the dollar to make the United States more competitive globally, a proposal dubbed the "Mar-a-Lago Accord".
"At this point we do not see a 'Mar-a-Lago Accord' as a concrete risk," Citigroup currency strategist Osamu Takashima said in a research note.
However, "countries such as Japan, which have sizeable foreign currency reserves and whose currency is undervalued, would tend to be the target in this case," he said.
The U.S. is Japan's biggest export destination and automobile shipments account for roughly 28% of its exports there. Japan is reeling from Trump's 25% duty on cars. Since its announcement on March 26, the benchmark Nikkei share average has slumped 6%.
Akazawa offered few details of the initial discussions, but told reporters Trump said getting a deal done with Japan was a "top priority".
MAR-A-LAGO ACCORD?
The yen has already come off its lows against the dollar.
In the middle of last year, the dollar was worth nearly 162 yen for the first time since 1986, the period after the Plaza Accord when Japan, Britain, Germany and France agreed with the U.S. at New York's Plaza Hotel to devalue the dollar.
The Mar-a-Lago Accord is a reference to this and Trump's Mar-a-Lago Resort in Florida.
This week though, the dollar dipped below 142 yen following a steep slide on fears that Trump's focus on tariffs could trigger U.S. recession.
And speculative bets on further yen strength have built up to the highest levels since the Commodity Futures Trading Commission (CFTC) started recording the data in 1986.
Trump and Bessent would probably be well advised to bear in mind the current environment before making any strong demands for help weakening the dollar.
Unlike in 1985 at the time of the Plaza Accord, international investors hold nearly $15 trillion in U.S. government debt, which has held a special position as the benchmark for risk-free investment returns.
The Trump-induced Treasuries rout this month has called those assumptions into question and, while some level of calm has returned to debt markets this week, sentiment is fragile.
"We have to remember that the Treasury Secretary is the head salesperson for U.S. Treasuries," said Yunosuke Ikeda, Nomura's Japan head of macro research.
"Trying to talk down the dollar would be a very dangerous strategy at the moment, even if Bessent believes in the merits of a weaker currency in the longer term."
While the yen remains weak by historical standards and Tokyo also desires a stronger currency, authorities have said they hope to bolster the yen's value through initiatives such as better industrial competitiveness.
That may not be the quick fix Trump is angling for.
Nor can the Bank of Japan be called on to hurry rate hikes along. Rising borrowing costs and inflation are both pain points for voters, and crucial upper house elections loom in July.
"The Japanese side is going to say the BOJ is independent, and they are not trying to manipulate the currency," said Shoki Omori, chief desk strategist at Mizuho Securities.
"After all, we're in a tightening cycle." (Reporting by Kevin Buckland in Tokyo; Editing by Vidya Ranganathan and Lincoln Feast.)