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

TOKYO: US 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 US 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 US dollars for yen, but that would mean pulling out billions of dollars it has invested in US 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 US is Japan’s biggest export destination and automobile shipments account for roughly 28 per cent of its exports there. Japan is reeling from Trump’s 25 per cent duty on cars. Since its announcement on March 26, the benchmark Nikkei share average has slumped 6.0 per cent.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 US 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 US 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.