TheÂ Japanese yen is weakening against several major currency rivals atÂ theÂ end ofÂ theÂ trading week. With aÂ potential US-Japan trade war onÂ theÂ horizon, investors are frightened that anticipations ofÂ shrinking exports could lead toÂ anÂ economic contraction forÂ theÂ worldâs third-largest economy. Can Tokyo turn things around before trade talks with Washington begin?
According toÂ aÂ new Reuters poll, Japanese exports are expected to have tumbled 2.7% in March, following a 1.2% drop in February. Imports are forecast to have advanced 2.6% last month, the first increase since December. This will result in a $3.3 billion trade surplus.
TheÂ same survey estimates that consumer inflation is projected toÂ be flat inÂ March, causing great consternation atÂ theÂ Bank ofÂ Japan (BOJ) because it is still far away from meeting its 2% target rate.
Earlier this week, theÂ International Monetary Fund (IMF) released its outlook forÂ several major economies. OnÂ Thursday, speaking inÂ anÂ interview with Reuters, Odd Per Brekk, deputy director ofÂ theÂ IMF’s Asia andÂ Pacific department, said Japan needs toÂ rely onÂ spending rather than depending onÂ theÂ BOJ. TheÂ IMF also encourages Japan toÂ stop deferring its plans toÂ raise theÂ sales tax from 8% toÂ 10%.
If you ask where theÂ policy space is, fiscal policy should be theÂ first line ofÂ defense.
Japan shouldn’t defer onÂ theÂ consumption tax increase but if downside risks materialize, think about spending involving infrastructure andÂ social transfers.
TheÂ BOJ may consider further clarifying theÂ link between interest rates andÂ inflation, which could help heighten inflation expectations.
With theÂ national economy sputtering along, Tokyo is about toÂ embark onÂ tense trade deliberations with theÂ US. Japan had been able toÂ delay talks forÂ theÂ two years, but bilateral trade discussions are back onÂ between President Donald Trump andÂ Prime Minister Shinzo Abe.
While Abe has attempted to charm his way into minimizing any potential fallout from a trade spat with Trump, analysts do not think Japan will roll over and make concessions with the US. According to Ichiro Fujisaki, a former Japanese ambassador to the US:
It [is] theÂ US who asked forÂ these bilateral negotiations. So, itâs theÂ US who should put toÂ us what they want, rather than us offering this andÂ that before being asked.
TheÂ talks should commence asÂ soon asÂ theÂ US-China trade war finishes.
TheÂ USD/JPY currency pair rose 0.34% toÂ 112.04, from anÂ opening ofÂ 111.66, atÂ 16:47 GMT onÂ Friday. TheÂ EUR/JPY climbed 0.8% toÂ 126.55, from anÂ opening ofÂ 125.67.
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