Japan’s renminbi is becoming a safe haven halo faster than Tokyo’s legislators would like, as Donald Trump restores the dollar’s value.
The extent to which the US government’s trade war is slamming trust in money property can be seen in the Japanese stock’s roughly 10 % march so far this year, buying immediately at around 144. The Bank of Japan has also been forced to renounce its long-awaited plans to raise rates once more today ( May 1 ) as a result of the yen’s rally.
The second 100 days of Trump 2.0’s administration have been turbulent for BOJ Governor Kazuo Ueda, who has had no prior experience. Back in January, Ueda was full-speed back with his two-year desire to stop Japan’s deflation-era plan structure.
The Ueda’s group also increased benchmark rates by 0.5 %, reaching a 17-year higher that month. Most economists predicted that the BOJ may increase rates to 0.75 % this week, kick-starting efforts to kick off quantitative easing into high gear a fortnight ago.
Next came Trump’s taxes, which have economics downgrading Japan’s leads in real time. Case in point: stock output across Japan decreased by 1.1 % in March from February as US levies hit companies. The sector’s performance is currently below what it was at the top of Covid-19 in 2021.
It’s a warning, says Moody’s Analytics analyst Stefan Angrick, that Chinese “manufacturing has gone from bad to worse since the epidemic, grappling with supply-chain problems, domestic production difficulties and increased international competition”.
Despite Trump’s 25 % tax on cars and a 24 % tariff on Japan, Angrick claims that” things will only get more difficult from here.” Washington’s trade threats have tremendously complicated the outlook, he says, miserable business and consumer confidence, he says.” While pauses and limited exemptions have provided some momentary relief, pauses and incomplete exemptions have provided some short-term relief. This, Angrick information, indicates” Japan can’t bank on domestic desire to mitigate the effects of weaker imports”.
So the BOJ’s resistance to keep increasing levels is a result. Despite that, Ueda’s team revised its forecast for gross domestic product ( GDP ) by more than half to 0.5 % from the 1.1 % it set for January. In its why-we-stood-pat speech on May 1, the BOJ noted that” business and other plans” hitting international development dominated its choice.
Even with Japanese inflation well above 3 %, economists are working hard to put a brave face on the BOJ’s failure to act.
We see a slight tailwind, according to Krishna Bhimavarapu of State Street Global Advisors,” for whatever reason.” The first is that a stronger yen may lower Japan’s inflation, which is still the most severe among advanced economies, and the second is that the BOJ gains confidence that the wage-price cycle may remain intact even as the yen strengthens, which is. We see the BOJ hiking once this year, but more importantly, staying the course next year if the global economy soft-lands like we expect”.
In such analyses, the word “if” is very important. Concerns about the yen’s rally may affect the BOJ’s best-laid plans for the rest of 2025. Given the policy chaos in Washington and fresh signs the US may be headed for recession, prospects for the BOJ’s rate “normalization” campaign are dimming by the month.
The Federal Reserve’s situation is exacerbated by the news that “growth has simply vanished,” according to Chris Rupkey, chief economist at financial research firm Fwdbonds.
Not everyone believes that the US is suddenly veering into recession territory because of the 0.3 % decline in annualized growth over the first three months of the year. ” While a decline during an expansion is unusual, it’s not unheard of, and the economy isn’t in a recession”, says Ryan Sweet at Oxford Economics.
However, Trump will likely increase pressure on Fed Chair Jerome Powell to lower rates as the GDP growth in its first quarter since early 2022 declines. Bond investors have been alarmed by Trump’s assault on the independence of the Fed, which has already increased yields on 10-year debt by 4.2 %.
This creates a fresh dilemma for Ueda should the yen’s sudden place in the safe-haven spotlight persist and broaden. Investors reacted favorably to the yen’s weakness in recent years through the so-called “yen-carry trade.”
Japan has become the world’s top creditor after 46 years of near-zero rates. Investors everywhere made it standard practice to borrow cheaply in yen to bet on higher-yielding assets from New York to Sao Paulo to Seoul.
The yen’s smallest drop or rally can send shockwaves through global asset markets. The yen-carry trade is frequently compared to the shark from” Jaws,” according to traders in Tokyo.
Several times during Steven Spielberg ‘s , 1975 film, the killer shark appeared to lose interest in its victims. They were tamed into a false sense of security by this, only to find out that the shark had suddenly reappeared and wreaked havoc.
The carry trade hasn’t reached the level that many investors believe. No one can say whether Team Ueda might make good on its hawkish rhetoric earlier this year. However, it’s highly likely that the BOJ will become even more hesitant to tighten now that Trump’s tariffs are hurting Japan due to concerns about the impact of Asia’s No 2 economy.
Among those who believe the yen is becoming the preferred currency for many investors looking to protect themselves from Trump’s unpredictable policies is David Roche, a strategist at Quantum Strategy.
” You want to keep out of the euro and own the yen, which is now the new safe haven as the US is getting to look very dangerous and US exceptionalism will suffer from the costs of Trump’s commercial tariffs”, Roche tells Fortune magazine.
Given the strength of the economy, as well as the predictability and stability of the economy, Nada Choueiri, deputy director of the International Monetary Fund’s Asia-Pacific department, claims that the yen still constitutes a safe-haven currency.
Tokyo‘s “authorities are committed to a flexible exchange-rate regime,” Choueiri continued. It serves the country well. It aids in shock absorption. We back their support for this regime, which eases the recovery process.
Yet Trump’s desire for a weaker dollar and stronger yen could push the limits of Tokyo’s tolerance for a stronger exchange rate. One issue is that China isn’t boosting its yuan.
Japan runs the risk of losing its own backyard competitiveness the more the yen rises while the yuan is still standing. Also, with national elections approaching in July, it’s impossible for Tokyo to ignore the hyper-fraught trade environment that lies ahead.
China’s deflation and overcapacity issues are already stifling the political discourse in Tokyo. Any notion that Japan Inc. is the losing party in Asian trade currents could make Ueda and Shigeru Ishiba’s Liberal Democratic Party more difficult to live in.
Recently, Japanese Finance Minister Katsunobu Kato stressed that he and US Treasury Secretary Scott Bessent “did not touch upon exchange-rate targets” while discussing a US-Japan trade deal.
Trump, however, is undoubtedly interested in a stronger yen. However, officials who are concerned about Japan’s future growth may be alarmed by the currency’s recent gains.
Coming on top of Trump’s tariffs– and the ever-present risk of more to come – the yen appreciating 15 % or 20 % this year could devastate Japan’s growth prospects.
For instance, Citigroup analysts warn that a coordinated devaluation effort, such as the” Mar-a-Lago Accord,” may harm Japan’s interests, especially given the fragile global financial environment that the Ueda economy is having to navigate.
Worries about Trump trying to bully Group of Seven members into engineering a weaker dollar have world markets in a constant state of anxiety.
According to economist Marcello Estevao at the Institute of International Finance,” the administration faces the challenge of reconciling its policy preference for a weaker dollar with the reality of established global demand for US assets.”
Currency realignment is dependent on credible fiscal frameworks and sound economic governance, not tactical market interventions. The path forward lies in navigating these structural forces with realism, balancing policy goals against the fundamental constraints imposed by global capital markets“, Estevao says.
According to BMI Research, a Fitch Solutions company, “on the yen, we maintain our forecast for it to strengthen to JPY137/USD by the end of this year, but we now see higher risks of a stronger yen with growing demand for safe assets and more-than-expected cuts by the Federal Reserve narrowing the interest rate differential in the yen’s favor.”
Yet there is little cause to believe that Japan Inc. is prepared to take a significantly higher exchange rate. The hit to corporate profits could give global funds pouring back into Japan in recent years some serious buyer’s remorse.
A weaker yen has been the glue that keeps Japan’s uncompetitive economy together for a quarter century, but especially in the last 12 years. Tokyo was able to slow-walk steps to reduce bureaucracy, reinvigorate innovation, boost productivity, internationalize labor markets, and empower women thanks to the country’s increasingly liberal BOJ policies and a falling exchange rate.
As the liquidity tide leaves the dollar and the yen rises, though, Japan will be hard-pressed to keep growth in positive territory at all.
Follow William Pesek on X at @WilliamPesek