Japan braces for Trump assault on trade, yen policy as
summit looms
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[April 04, 2018]
By Leika Kihara and Tetsushi Kajimoto
TOKYO (Reuters) - Japanese government
officials are bracing for Donald Trump to get tough in trade talks, and
are particularly anxious that the U.S. president could target Prime
Minister Shinzo Abe's weak-yen policies.
The deal Trump clinched with South Korea last month, which was reached
in unusually quick negotiations and included a side deal to deter
competitive currency devaluation, was the kind of agreement Tokyo fears
most.
The officials told Reuters that they worry that similar tactics could be
used against Tokyo when Trump meets Abe for a summit at Mar-a-Lago, the
president's Florida resort, later this month.
If Trump forces Bank of Japan and currency policy into discussions,
Japanese policymakers don’t have an obvious way to appease him,
especially given the unpredictable nature of his attacks.
The biggest risk is if Trump links trade with currency policy and
accuses Japan of keeping the yen artificially weak through ultra-easy
monetary policy, especially as he seeks to appeal to voters ahead of
November’s mid-term U.S. congressional elections. Back in January 2017,
Trump alleged that Japan used its "money supply" to weaken the yen and
give exporters an unfair advantage.
Any such concerted pressure could bind Tokyo's hands in dealing with a
climb in the yen, which would hurt the nation’s export-reliant economy
that has been growing but may not be resilient to such a sideswipe.
"As mid-term elections draw near, it's possible Washington could put
Japan's currency policy to notice," said a Japanese government official
with knowledge of the negotiations.
Another official said: "It's hard to predict what Trump would say, so
the BOJ's policy could come under fire. It's not an immediate risk but
something in everyone's mind.”
WARY OF SENDING SIGNAL
To be sure, the side agreement on the won that South Korea agreed to is
not binding and focuses on what Japan already does – disclose details on
currency intervention such as how much was spent and when. Still, Japan
is wary of sending out any signal to markets that Trump is attacking
Japan’s currency policy and that this could in any way prevent Tokyo
from acting to restrain excessive yen gains.
When Abe and Trump met in February 2017, they kicked off a bilateral
economic dialogue led by their deputies to discuss a series of issues,
including trade, infrastructure and technical aid.
By broadening the agenda, Japan has managed so far to avert direct U.S.
demands for negotiations over a bilateral trade pact, known as a free
trade agreement (FTA).
Japan has long upheld a multilateral framework as its export-reliant
economy has benefited greatly from global free trade. This approach
helps Japan diffuse direct pressure from countries like the United
States to open up its politically sensitive markets, such as
agriculture.
Japanese officials say they will resist two-way trade deals with the
United States at the summit, even if that reduces the chance of gaining
exemptions for Washington's recently introduced steel and aluminum
tariffs. Trump temporarily excluded six trade partners, including
Canada, Mexico and the European Union from these import duties. South
Korea avoided tariffs but at a cost of agreeing to export quotas.
There are now major questions about whether the Japanese multilateral
approach will be good enough for Trump.
The U.S. Trade Representative last week criticized what it said were
non-tariff barriers to the Japanese car market and called for greater
access to Japan for American beef and rice.
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U.S. Dollar and Japan
Yen notes are seen in this picture illustration June 2, 2017.
REUTERS/Thomas White/Illustration/File Photo
"The United States is only interested in a bilateral deal and probably won't
listen to Japanese calls for a multilateral approach on trade," said Naoyuki
Shinohara, Japan's former top currency diplomat who retains close contact with
incumbent policymakers.
"Japan will eventually have to enter FTA talks" and face U.S. pressure to open
up its auto and farm markets, he said.
BOJ'S COMMUNICATION CHALLENGE
Some officials say Japan is in a stronger position than South Korea and won't
have to compromise as much. That is because it still does not have a bilateral
FTA, is transparent on currency policy and hasn't intervened in the currency
market since northeastern Japan was hit by a massive earthquake and resulting
tsunami in 2011.
"Japan has far more to lose from a bilateral FTA. It doesn't make sense to do
this to avoid tariffs," said a third government official directly involved in
bilateral negotiations. "We'll never allow currency issues be tied to trade.
That's absolutely unacceptable."
A renewed attack on Japan's currency policy will be damaging particularly since
Tokyo has hardly any ammunition left to fight another yen spike.
Fears of a trade war have boosted investors' demand for the safe-haven yen and
pushed up the Japanese currency to around 106 against the dollar, significantly
stronger than the 109-level on which many exporters base their earnings
forecasts for the current fiscal year to March 2019.
Japanese policymakers have warned that the yen's 7 percent gain against the
dollar this year is too volatile a move, though such verbal warnings have had
little effect in keeping yen rises in check.
While currency intervention hasn’t been ruled out if the yen spikes to less than
100 to the dollar, gaining U.S. consent for such a move would be extremely hard,
the officials say.
That leaves monetary policy as a last resort, though the BOJ too has barely any
tools left to fight a currency gain or another recession after BOJ Governor
Haruhiko Kuroda's "bazooka" stimulus that started in 2013.
The BOJ's huge buying has dried up bond market liquidity and years of near-zero
interest rates have eroded bank profits, raising concern that more easing could
do more harm than good.
Even maintaining the current policy, which pegs Japanese government bond yields
at zero even as U.S. interest rates rise, could draw U.S. heat if Washington
perceives it as intended to weaken the yen, some analysts say.
“The BOJ’s current framework is clearly a weak-yen policy. Japan would struggle
to explain otherwise if it comes under heat by the United States,” said Yasuhide
Yajima, chief economist at NLI Research Institute.
Hiroshi Watanabe, a former top Japanese currency diplomat, said Tokyo could face
criticism if the dollar rises to around 115 yen and the U.S.-Japan interest rate
gap widens to around 350 basis points.
"The BOJ should be mindful that at some point, the United States could argue
that it's using monetary policy" to keep the yen weak, he said.
(Reporting by Leika Kihara; Editing by Martin Howell)
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