Yen Bears See a Roadblock in Trump's Support for DetroitBy and
1980s dispute led to trade limits, yen gain after Plaza Accord
Autos comprise 76% of Japan’s trade surplus with the U.S.
Call it the Detroit put.
The greenback’s surge against the yen has petered out even as the dollar’s yield advantage widens because the Federal Reserve is getting ready to raise interest rates. Instead of tumbling toward 120 per dollar as many forecast at the start of 2017, Japan’s currency is holding above 115. So, what’s holding the dollar down?
Tokyo strategists say President Donald Trump’s vow to bring manufacturing jobs back to the U.S. is playing a role, and Japan’s dominance in the auto industry means any significant slide in the yen from here risks a storm of jawboning from the White House.
The Rust Belt states -- Indiana, Wisconsin, Michigan, Ohio and Pennsylvania -- were key to Trump’s victory and he showed the white working class voters there he hadn’t forgotten them when he tweeted a few days after his inauguration that car companies need to start making things in the U.S. He’s also said Japanese champions benefit from an unfairly low exchange rate.
As the chart below shows, the U.S.’s trade shortfall with Japan is second only to China. What’s more, motor vehicles and parts made up 76 percent of the deficit, according to data from the U.S. Department of Commerce. With the Asian nation already on notice as a potential currency manipulator, traders may be wary that any steep yen declines will spur the U.S. leader to talk down the dollar again.
The U.S. trade deficit expanded to $48.5 billion in January, from $44.3 billion in the prior month, according to trade balance figures released Tuesday by the Commerce Department. It was the largest gap since March 2012.
“Trump has started to put emphasis on trade imbalances with Japan and China,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities Co. in Tokyo. “That shows the president won’t tolerate a stronger dollar on the back of higher yields in a bid to boost employment in the U.S. manufacturing industry.”
Since Trump’s election in November, the rally in the dollar-yen has lagged behind the widening yield premium the U.S. offers over Japan even as expectations for a Fed hike in March have increased. Meanwhile, leveraged funds have continued to reduce their bets on a weaker yen, signaling they doubt that tighter U.S. monetary policy can have much impact.
The U.S. president criticized Japan and China in January for devaluing their currencies, echoing claims from the American Automotive Policy Council. While a meeting between Japanese Prime Minister Shinzo Abe and Trump last month did soothe tensions, the trade rhetoric continues.
In his first speech to Congress, Trump reiterated his pledge to create a level playing field for American companies and workers. His Commerce Secretary Wilbur Ross said Tuesday that the U.S. trade deficit in January shows there’s “much work to be done,” pledging to renegotiate trade deals.
The two countries are seeking to set up by mid-March a meeting between Ross and Japan’s trade minister Hiroshige Seko, according to a Japanese government official. Seko plans to discuss why the U.S. auto trade deficit with Japan remains large despite decades of efforts to correct it, according to an auto industry official.
“Historically the dollar hasn’t fared well against reserve currencies like the euro or yen or the pound during times of U.S.-led protectionism,” said Mark McCormick, North American head of foreign-exchange strategy at Toronto-Dominion Bank. “Trade spats with the Japanese over the auto sector during the Clinton years led to a weaker dollar and the same happened” during George W. Bush’s steel spats with the Europeans, he said.
Japan imposed voluntary limits to car exports to the U.S. in the 1980s and 1990s, and Japanese automakers agreed to increase auto parts imports in 1995. President Ronald Reagan also engineered the September 1985 Plaza Accord to weaken the greenback against the currencies of major peers, setting off a rally that saw the yen almost double against the dollar within three years.
“Japan has accepted various requests from the U.S. in the long history of conflict over auto trade, so there remains little for Japan” to help narrow the U.S.’s auto-related deficit, said Junya Tanase, chief foreign-exchange strategist at JPMorgan Chase & Co. in Tokyo. “There is the risk that the U.S. government will resort to the exchange rate if the talks between the countries fail to ease U.S. automakers’ dissatisfaction.”
The latest Japanese trade figures may help when Finance Minister Taro Aso start bilateral discussions with U.S. Vice President Mike Pence in April. The Asian nation’s seasonally-adjusted trade balance shrank to 146.1 billion yen ($1.3 billion) in January, down from 588.3 billion yen the prior month, as imports surged.
The stocks of Japan’s automakers are also an indicator that this issue is making a difference. The biggest five, including Toyota Motor Corp., have collectively underperformed the benchmark Topix index since the start of this year. Toyota estimates that a one-yen drop in the dollar can reduce its operating profit by 40 billion yen.
Japan Automobile Manufacturers Association spokesman Hirokazu Furukawa declined to comment on a proposed U.S. border tax and its potential impact on Japanese car exports.