Japanese officials left the German spa town of Baden-Baden more refreshed than you’d think. It was a blow, certainly, that the Americans banished the free trade imperative from the Group of 20 platform. But Tokyo came away from the weekend confab with its weak yen strategy intact.

The post-Group of 20 glow may be short-lived.

U.S. President Donald Trump’s main gripe is with Beijing, whose policies he’s said are “raping our country.” Surely, there’s plenty of scope to hit China for predatory trade practices, subsidies for state-owned giants and a bull market in counterfeit goods. The more this White House studies foreign exchange dynamics, though, the more it’ll see the yuan is overvalued given dueling bubbles in Chinese debt, credit and property. Beijing is actually waging a war with yuan bears, which is pushing its arsenal of foreign currency reserves below $3 trillion.

Japan, by contrast, is all-in for a weaker yen. Four-plus years into Prime Minister Shinzo Abe’s effort to end deflation, Abenomics is 90 percent monetary easing, 10 percent structural change — and that’s being kind. Now, the Federal Reserve’s tightening moves threaten to drive the yen even lower versus the dollar, trolling the Trump White House.

“The increasing divergence in U.S.-Japanese monetary policy over the next two years will drive a further depreciation in JPY/USD to over 120 by end-2018,” says Sian Fenner of Oxford Economics. “Such a yen trajectory increases Japan’s vulnerability to more substantial threats of trade protectionism from the U.S. administration.”

The yen and bond yields, remember, could be just one early-morning Twitter rant away from skyrocketing. It’s not clear Japanese Finance Minister Taro Aso understands this risk. He seemed rather self-congratulatory over the weekend, saying that “we agreed that it’s important to stick with what the G-20 and G-7 have decided on the matter” of currencies. Well, that is until @realDonaldTrump changes his mind.

Of course, Tokyo could find a silver lining in the Trump effect sweeping world markets. Look no further than Abe traveling to Hannover, Germany to join forces with German Chancellor Angela Merkel against protectionist impulses emanating from Washington and London.

This show of force by the No. 3 and No. 4 economies came off a week where both governments had contacts with Team Trump. Neither jabbed Trump’s anti-globalization stance directly, but the message was loud and clear.

Might America’s turn inward catalyze Abe to accelerate structural upgrades? Trump’s first act as president was scrapping the Trans-Pacific Partnership, a deal Abe spent vast amounts of political capital joining. Perhaps it was the wake-up call needed to redouble efforts on a Japan-EU free trade deal that’s dragged on for seven years. It might inspire Abe to get serious about deregulation, liberalizing labor markets, increasing innovation and opening sectors from manufacturing to services to greater international involvement. Agriculture, too, an aggressively protected industry.

Yet Tokyo’s weak yen is a hard habit to break, as Aso’s post-G-20 victory lap suggests. It does more to fuel complacency than sustainable growth. Japan has been relying on stimulative exchange rates for 20 years now. In 2004 alone, for example, it spent the equivalent of Indonesia’s annual gross domestic product intervening in markets. A decade later, Bank of Japan Gov. Haruhiko Kuroda was using “shock and awe” tactics to give Tokyo a fresh edge in export markets — and with then-U.S. President Barack Obama’s tolerance.

Will that work with the Trump White House? Almost certainly not. The Fed’s tightening cycle will offer some geopolitical cover. Given the persistence of Japanese deflation, Tokyo may be able to lobby U.S. Treasury Secretary Steven Mnuchin or Trump trade adviser Peter Navarro against bashing the yen. Yet risks abound with the BOJ more likely to ease further than taper bond purchases.

“While further depreciation seems warranted given Japan’s economic situation, such a yen trajectory increases the vulnerability of Japan to more substantial attacks from the U.S. administration,” says Fenner. “This includes the risk that Japan is labeled as a currency manipulator and/or Trump increases tariffs on Japanese exports to the U.S.”

China isn’t off the hook — far from it. Trump may make good on his threats of tariffs as high as 45 percent. But Tokyo is mistaken to think it won’t suddenly find itself in the line of fire.

Abe’s pro-trade stand with Merkel might score him more soft power points if Tokyo were reforming more boldly at home. That goes, too, for Japan’s standing with the Trump administration. It’s fine that Tokyo is helping create $450 million of new markets and 700,000 U.S. jobs. It’s nice that Softbank and Toyota are upping investments in the U.S. Even Japan’s Government Pension Investment Fund may pour money into Trump’s “America First” infrastructure boom.

All bets may be off, though, as the Fed and BOJ move apart and depress the yen in ways that irk Team Trump. That post-Baden-Baden glow could be fleeting.

William Pesek is executive editor of Barron’s Asia and writes on Asian economics, markets and politics. www.barronsasia.com

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