The first summit meeting between US President Trump and Japanese Prime Minister Abe ended in a friendly manner, with little conflict. The success for the Japanese government was to have separated FX policy discussion from monetary and trade
policies. The joint statement endorsed Japan’s three arrow policies, including monetary policy. Market concerns over US criticism of BOJ easing should decline. Although we cannot completely rule out long-term downside risks for USD/JPY associated with FX
policies, in the short term we believe lower concerns over US criticism of Japanese FX and monetary policies will support a USD/JPY recovery.
The first summit meeting between US President Trump and Japanese Prime Minister Abe ended in a friendly manner, with little conflict, at least on the surface. From Japan’s stand point, it was successful as it achieved a separation of FX policy discussion from other policy issues, such as trade, monetary policy and defence policies.
The two nations said that they will start a new high-level economic policy dialogue, led by Vice President Pence and Deputy Prime Minister Aso. Three main areas will be discussed: 1) trade policy, 2) cooperation in infrastructure, energy, cyberspace;
and 3) macroeconomic policy coordination (fiscal and monetary). FX policy will be discussed separately by the treasury secretary and finance minister. Before the meeting, Japan’s major concern had been the inclusion of FX policy within monetary
policy and/or trade policy.
Japanese policymakers have been arguing that Japanese macro policy is not aimed at weakening JPY, while monetary easing by the BOJ is necessary to achieve the inflation target (see Rebuttal and compromise from Japan, 1 February 2017). Japan has not
intervened in the FX market since November 2011 too. Nonetheless, there seems to be some concern among Japanese policymakers and investors that the US could criticize BOJ easing as a tool to weaken JPY. This concern may in turn have increased
speculation for higher Japanese yields recently (see BOJ active ahead of summit meeting, 10 February 2017). Although, the high-level dialogue is expected to include macroeconomic policy cooperation, including on monetary policy, the dialogue may not focus on the FX policy this will be discussed at the different place. In addition, the joint statement released after the press conference stated that “the President and the Prime Minister reaffirmed their commitments to using the three-pronged approach of mutuallyreinforcing
fiscal, monetary, and structural policies to strengthen domestic and global economic demand.” An MOF official is reported to have said over the weekend that Japan and the US confirmed a commitment to continued accommodative monetary policy as part of Prime Minister Abe’s three-arrow economic program (Bloomberg, unconfirmed elsewhere). These developments are likely to ease market concerns over the US criticism on Japanese monetary policy, increasing market confidence on the efficacy of BOJ’s current policy framework.
We believe that the high-level dialogue on economic policy has the potential to become a discussion on a bilateral free trade agreement given President Trump’s decision to leave the Trans-Pacific Partnership. Japan’s concern was the possibility that FX policy as well as trade policy would be included on the agenda. However, this was not the case, again alleviating concerns among Japanese investors.
Another positive development, in our view, is Vice President Pence being the counterpart at the dialogue. The vice president is a former governor of Indiana, a state in which Japanese carmakers have invested heavily. As such, we believe Japan is likely to drive the argument that Japanese investment into the US (unlike that of Chinese companies, for example) has created jobs there . We expect Vice President Pence to appreciate this situation, which could work in Japan’s favour in future negotiations. Cooperation in infrastructure and energy was also included as one of three areas in which Japan can offer investment in the US and purchases of more US energy. These efforts could help alleviate US pressure on Japanese trade and macroeconomic policies, in our opinion. During the press conference, when asked about Chinese FX policy, President Trump said that he has long complained about currency manipulation. We expect FX policy to remain a high priority for the Trump administration and thus will continue to monitor any communications about USD and FX policy in general. As FX policy has now been delegated to the treasury secretary and finance minister, the scheduled G20 finance ministers meeting on 18-19 March will be important too. Any significant changes to commitments on monetary and FX policy will be the focus of market participants.
Nonetheless, in the short term, reduced concern over US criticism of Japanese FX and monetary policy is likely to support a USD/JPY recovery. As doubt over the BOJ’s easing framework has also likely declined for now, yield spreads may widen smoothly if there are tailwinds outside Japan. Fed Chair Yellen’s testimony on 14-15 February is the next key event for USD/JPY, as we believe downside pressures from concerns over negative comments from President Trump are likely ease at least for now.
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