The recent developments in Japan’s economic landscape have focused attention on the potential policies of incoming Prime Minister Sanae Takaichi, particularly in relation to currency valuation and trade relations with the United States.
Former U.S. President Donald Trump has long accused Japan of “unfair trade practices,” specifically pointing to Japan’s currency strategies as a means of securing an economic edge. In March, Trump claimed that Tokyo actively weakened its currency, urging Japanese leaders to cease actions that he deemed detrimental to international trade norms. This narrative, familiar to many observers, has roots that trace back to Trump’s real estate days.
The remarks by Trump highlight a continuing tension, particularly as Takaichi, often seen as a supporter of the late Shinzo Abe’s economic policies, positions herself at the helm of the world’s fourth-largest economy. A strong advocate of “Abenomics,” which emphasizes loose monetary policy and fiscal spending, Takaichi previously criticized the Bank of Japan’s plans to raise interest rates—moves that could strengthen the yen. This stance has contributed to market dynamics termed the “Takaichi trade,” where the Nikkei 225 has reached new heights, even as the yen has weakened to more than 150 against the dollar.
The 150-yen threshold is significant; historically, it has prompted Japanese officials to intervene in currency markets to stabilize the yen, particularly as a weak currency could exacerbate inflation and issues of economic viability for households reliant on imports. Such a situation could invigorate Trump’s arguments regarding Japan benefiting from an undervalued currency at the expense of the U.S.
Market analysts suggest that Takaichi will likely navigate these pressures cautiously, aiming to maintain a healthy relationship with Washington. Chief FX Strategist Hirofumi Suzuki from Sumitomo Mitsui Banking Corporation notes that while initial trends may show a weakening yen, this is not expected to be a long-term situation. He comments that if the yen’s weakness continues, it could strain U.S.-Japan relations, but current indicators do not predict immediate conflict.
Takahide Kiuchi, a former member of the Bank of Japan’s policy board, highlights the growing concern within the Trump administration about the yen’s depreciation. Despite this context, he believes that it would unlikely dissolve existing agreements between the two nations but suggests that the U.S. could advocate for adjustments in Japan’s monetary approach.
The economic implications of a weak yen are profound, especially for exporters which significantly influence Japan’s GDP growth. However, the rising costs of imports due to a weaker currency also threaten to increase inflation, a pressing concern for the Japanese economy. Last year, the yen plummeted to a 34-year low, prompting government interventions.
Economists like Norihiko Yamaguchi from Oxford Economics argue that Takaichi’s policies will have to be realistic in addressing these inflationary pressures. While she has opposed rate hikes, the necessity of combating import-induced inflation could compel her to reconsider this stance. The Bank of Japan may have to implement interest rate increases to align more closely with its inflation target, which has recently remained above 2% for over three years.
William Pesek, author of “Japanization: What the World Can Learn from Japan’s Lost Decades,” emphasizes the significance of inflation on Takaichi’s political future, hinting that her leadership could hinge on her ability to manage rising prices effectively. Jesper Koll from Monex Group echoes this sentiment, asserting that a stronger yen will be crucial to preserving consumer purchasing power and, by extension, Japan’s economic stability.
As Takaichi prepares to tackle these multidimensional challenges, how she navigates the intersection of domestic inflation and international trade relations will be pivotal for her administration and Japan’s future economic trajectory.
