The Abe-Trump summit, scheduled for 10-11 February in Washington, D.C. and Florida, is shaping up to be a pivotal event for US-Japan relations and the currency market. While the Japanese side appears to want the talks to focus on security issues, recent rhetoric from President Trump has raised concern that trade and currency may become a key focus. In particular, Trump’s recent comments that China and Japan had devalued their currencies by “playing the money market and devaluation market”– though not entirely clear what was really meant – has given rise to the view the US would pressure Japan to accept a deal that would constrain the Bank of Japan’s ability to carry out yield curve control and cause an early tightening of monetary policy in response to external pressures.
Such a development would not be unprecedented: following the Plaza Agreement in September 1985 in which the G5 countries agreed to coordinated FX intervention to weaken the dollar, the BoJ guided short-term interest rates higher in October, aimed at appreciating the yen from the macro fundamental side1 . However, we do not expect such a result this time and concern around the USD/JPY and BoJ is likely to be lifted for now.
Abe-Trump summit (10-11 Feb): main scenario = $/¥ Positiveve
While both tail-risk scenarios are likely to generate negative reactions in the equity market and yen strength amid risk off, we believe the summit will probably reduce market concern that the BoJ and USD/JPY would be subject to restrictions under the new Japan-US relationship in our main scenario.
We remain constructive on USD/JPY and long the pair targeting 120.
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