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.
"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.
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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
"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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