Japan’s foreign-exchange policy did not become a sticking point at Friday’s U.S.-Japan summit, and an encouraged Bank of Japan might keep its aggressive monetary easing program in place as it tries to stoke 2 percent inflation.
But concerns are lingering that U.S. President Donald Trump, who is eager to reduce the trade deficit, may lambaste Japan again for manipulating the currency markets if the U.S. dollar extends gains against the yen.
The BOJ’s daily bond-buying operations, aimed at pouring money into the financial markets and lowering Japan’s long-term interest rates in an attempt to shore up investment and consumption, have often affected foreign-exchange developments.
“What the BOJ is doing now might be considered currency manipulation by President Trump,” said Yuzo Sakai, manager of foreign-exchange business promotion at Tokyo Forex & Ueda Harlow.
“The possibility cannot be ruled out that President Trump will launch a verbal attack on the BOJ in the future,” Sakai said.
Trump and Prime Minister Shinzo Abe agreed in their talks that foreign-exchange issues will be handled by their finance ministers, Abe said at a joint news conference after the meeting at the White House.
The dollar has surged more than 10 percent against the yen since Trump won the presidential election on Nov. 8.
In January, Trump criticized Japan for intentionally pushing down the yen’s value but did not raise currency matters during the meeting, a senior Japanese official said.
Trump and Abe “reaffirmed their commitments to using the three-pronged approach of mutually reinforcing fiscal, monetary and structural policies to strengthen domestic and global economic demand,” a joint statement released after the summit said.
Tatsuo Yamasaki, a former vice finance minister for international affairs, said the agreement is a “big achievement,” as Trump has effectively allowed the BOJ to continue drastic monetary easing measures for the domestic purpose of beating Japan’s chronic deflation.
“Japan’s monetary policy is aimed at stabilizing prices and attaining a 2 percent inflation goal as soon as possible, not targeting stability in foreign-exchange rates,” BOJ Gov. Haruhiko Kuroda said late last month.
Echoing the governor’s stance, even after Trump’s accusation that Tokyo was guiding the yen lower, BOJ policymakers have pledged to stick to its current monetary policies because consumer prices have shown little sign of rapidly rising.
“Although the momentum toward achieving the price stability target of 2 percent has been maintained, it is not yet sufficiently firm and there is still a long way to go to achieve the target,” BOJ Deputy Gov. Hiroshi Nakaso said in a speech Thursday.
“Under these circumstances, I believe it is of utmost importance at the current phase that the bank persistently pursues powerful monetary easing,” Nakaso added.
Some analysts, however, are still skeptical whether Trump will no longer make complaints about the BOJ, given that he has vowed to expand U.S. exports and create jobs at home under his “America First” slogan.
At the news conference Trump said, “As far as the currency devaluations, I’ve been complaining about that for a long time.
“I believe that we will all eventually — and probably very much sooner than a lot of people understand or think — we will be all at a level playing field, because that’s the only way it’s fair. That’s the only way that you can fairly compete in trade and other things,” Trump added.
Trump is apparently pursuing a weaker dollar, which usually makes U.S. products cheaper abroad and increases the value of overseas revenues in dollar terms. But against his will, the dollar may remain firm against the yen, currency experts said.
“President Trump’s economic policies, centering on infrastructure investment and tax cuts, are expected to trigger the dollar’s appreciation,” Koji Fukaya, chief executive officer of FPG Securities Co., said.
Expectations for Trump’s policies have pumped up stock prices, slashing demand for U.S. government bonds and sending their yields higher. Debt prices move inversely to yields.
The BOJ, meanwhile, in September adopted a “yield curve control” policy that targets the yield on the 10-year Japanese government bond. The new policy is designed to keep the yield at around zero percent by adjusting the BOJ’s massive JGB purchases.
This has allowed the BOJ to boost its JGB purchases in regular or emergency debt-buying operations to curb rises in Japan’s long-term interest rates.
Amid mounting speculation that the U.S.-Japan interest rate gap will broaden further, demand for the dollar “is unlikely to wane soon,” Fukaya said.
Should such a situation continue, Trump may use “verbal intervention” to drive down the dollar, BOJ watchers said.
“It is possible that Trump will make remarks and post tweets to warn against a strong dollar in consideration of (export-oriented) U.S. manufacturers,” said Takeshi Minami, chief economist at the Norinchukin Research Institute.