The Trump-Abe Summit Will Be on Currency Traders' Radar

  • Trump’s outburst against Japan spurred surge in the yen
  • Japan’s currency strengthening despite BOJ: JPMorgan’s Sasaki

Japan's Prime Minister Kiichi Miyazawa, right, and U.S. President Bill Clinton at a Sushi restaurant ahead of the summit meeting in Tokyo, Japan, on July 9, 1993.

Source: The Asahi Shimbun via Getty Images

The last time dollar-yen traders were this focused on a U.S.-Japan summit might have been when Bill Clinton and Kiichi Miyazawa haggled over trade issues at a sushi dinner.

Just like in the early 1990s, trade tensions are back on the bilateral agenda ahead of President Donald Trump’s Feb. 10-11 meetings with Prime Minister Shinzo Abe. While Trump’s charges that a weakening yen makes for unfair competition won’t be a priority in the tete-a-tete, his concerns about the automobile industry -- the largest part of the U.S. trade deficit with Japan -- will be, an administration official said.

Looming over the session is the memory of the early Clinton era, when U.S. pressure on Japan contributed to surge in the yen to a postwar high against the dollar. Abe’s strategy of bringing gifts, highlighted by American-job creating investment, may be the key to easing pressure on the yen.

“It is all about how Trump will make an issue out of the trade imbalances, so the focus is on whether Japan can convincingly answer these largely unjust charges,” said Daisuke Karakama, chief market economist in Tokyo for Mizuho Bank Ltd. “The yen will weaken if the meeting ends in a friendly tone, and strengthen if the U.S. takes a tough stance on currency and trade issues.”

The yen dipped 0.3 percent against the dollar in Friday morning trading after the U.S. official’s remarks, trading at 113.64 as of 12:43 p.m. in Tokyo.

While America’s trade imbalance has improved somewhat, it’s still large in dollar terms. The country logged a trade deficit of $734.3 billion in 2016, U.S. data. The shortfall with China was the biggest, at $347 billion, followed by Japan’s $68.9 billion. And history shows episodes when investor focus on protectionism and the U.S. deficit has hammered the dollar.

In 1993, when Clinton pushed Japan with his get-tough approach and wrestled a trade accord out of Miyazawa, half of the U.S.’s trade deficit was accounted for by Japan. With Clinton administration officials signaling a preference for a stronger yen that year, the dollar tumbled 10 percent. By 1995, the dollar hit a postwar low against the yen.

“It is undignified of a U.S. president himself to talk down the currency at current levels, but such is the case with Trump administration,” said Satoshi Okumoto, Tokyo-based chief executive officer and president at Fukoku Capital Management Inc. “Anybody who recalls the Miyazawa-Clinton relationship can remember how a U.S. president’s reaction can have a huge impact on markets.”

Trump’s criticism about devaluation sent the yen up last week. Having already shot that salvo, odds for further harsh rhetoric at the summit might be reduced, according to Kyosuke Suzuki, head of foreign exchange and money-market sales at Societe Generale SA in Tokyo. 

The concerns raised in the lead-up to the summit may set the dollar up for a relief rally Monday if the meeting goes smoothly, Suzuki said. He saw upside at most around 114 to 115 yen. In the event of yen buying, 111.30 is the first line of support, he said. The currency was at 113.31 as of 8:07 a.m. in Tokyo.

“Trump already effectively made it difficult psychologically to aggressively sell the yen, so I don’t expect anything unsettling for markets -- he may come out with moderate requests on selling U.S. cars in Japan, or investing in America to create jobs,” Suzuki said.

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