Japan's 120 Yen Line-in-Sand Offers Currency Detente to Trump

  • Japanese finance minister says yen is still on the strong side
  • Yen has risen 2.7 percent against the U.S. dollar in 2017

Japan’s government looks to be agreeing with Donald Trump that there should be limits to the yen’s decline.

As the U.S. and Japan spar over the link between exchange rates and export competitiveness, Japanese Finance Minister Taro Aso broke with convention on Wednesday by mentioning a specific level for the yen. He argued that the current level, about 114 yen per dollar, wasn’t weak, as the currency was still stronger than before the 2008 collapse of Lehman Brothers Holdings Inc.

“Aso seems to think that the yen is too weak if dollar-yen rallies to 120,” Tohru Sasaki, head of Japan markets research at JPMorgan Chase & Co., wrote in a note today. “Japan probably wants dollar-yen to stay around current level for long time.”

It’s not the first time that Japanese officials have portrayed the pre-Lehman exchange rate as a baseline. In June 2015, with the yen tumbling to a decade-low of 125.86, Bank of Japan Governor Haruhiko Kuroda said the currency was unlikely to weaken much further in real effective terms -- a gauge that incorporates differences in inflation rates among major trading partners.

The post-Lehman bust catastrophe saw haven demand for the yen propel it on a three-year surge, and a postwar record of 75.35 in 2011. That strength inflicted pain on Japanese exporters, eroding their market share and profits, along with manufacturing jobs. When Abenomics ushered in record monetary stimulus and the yen tumbled, some then voiced concern about excessive weakness undermining consumer spending.

“The comment from Kuroda eventually capped dollar-yen,” Sasaki wrote Thursday. “Aso shifted the line downward about 5 yen.”

Japan’s currency ended 2016 some 12 percent stronger on a real effective basis than it was when Kuroda made his comments. In terms of the dollar spot rate, the yen has risen 7.5 percent between that June and today.

“It is understandable that Japanese officials do not want dollar-yen to rally too much from here because it may cause pressure from U.S. administration,” Sasaki said. Trump last month said that Japan, along with China, “play the money market, they play the devaluation market and we sit there like a bunch of dummies.”

Aso spoke about a month before he’s scheduled to meet with U.S. Treasury Secretary Steven Mnuchin and other counterparts from the Group of 20 in Germany. The finance chief on Wednesday told lawmakers he would carefully explain to Mnuchin that the yen is still on the strong side. He spoke with Mnuchin by telephone Thursday morning, though currencies weren’t discussed, the Ministry of Finance in Tokyo said.

Though a weaker yen typically propels Japanese equities, a move much beyond 120 might rattle Japanese stock investors, according to Shusuke Yamada, chief Japan currency and equity strategist at Bank of America Merrill Lynch in Tokyo. If the currency drops beyond 130, it clearly wouldn’t be good for the Japanese economy and equities as high import costs bite, he said.

Yamada recommended buying the dollar when it dips against the yen, as long as it is below 120, and selling dollar strength above that level.