U.S. President Donald Trump said he told the leaders of Japan and China they could not continue to reduce the value of their currencies, as doing so would be unfair to the United States.
The remarks added to market jitters as Trump's new 25% tariffs on imports from Mexico and Canada took effect on Tuesday, along with a doubling of duties on Chinese goods to 20%, in a fresh escalation of global trade tensions.
Highlighting the risk that Japan's export-reliant economy faces from uncertainty over Washington's currency and tariff policies, the Nikkei benchmark tumbled nearly 2% on Tuesday as Trump's comments drove up the yen.
The yen briefly climbed to 148.60 per dollar on Tuesday, up from around 150 on Monday.
“I’ve called President Xi, I’ve called the leaders of Japan to say you can’t continue to reduce and break down your currency,“ Trump said at the White House on Monday.
“You can’t do it because it’s unfair to us. It’s very hard for us to make tractors, Caterpillar here, when Japan, China and other places are killing their currency, meaning driving it down,“ he said.
Instead of complaining repeatedly over the phone over such attempts, the United States could make up for the disadvantage its manufacturers suffer by imposing tariffs, Trump added.
“So all of these things add up,“ he said. “And the way you solve it very easily is with tariffs.”
Tokyo was not adopting policies directly aimed at weakening the yen, Japanese Finance Minister Katsunobu Kato said, when asked about Trump's comments.
“Japan has confirmed its basic stance on currency policy” with G7 countries and the United States, including at two-way talks with U.S. Treasury Secretary Scott Bessent on Jan. 29, Kato told a news conference in Tokyo on Tuesday.
Prime Minister Shigeru Ishiba also told parliament Japan was not pursuing a so-called “currency devaluation policy,“ adding that he had no phone calls from Trump on exchange-rate policy.
FOCUS ON BOJ
Japan and China were accused by Trump of intentionally weakening their currencies in his first term as president. A series of tit-for-tat U.S.-China tariff announcements drove the Chinese currency down more than 12% against the dollar between March 2018 and May 2020.
Recently, China has focused on stabilising its currency's moves. The yuan inched higher against the dollar on Tuesday as the central bank continued to guide the currency firmer - a move some analysts saw as aimed at easing friction with Washington.
Japanese policymakers, for their part, have been sensitive to the risk of Trump making explicit comments about the yen and causing market volatility that could hurt a fragile economic recovery.
While a weak yen boosts Japanese exports, Tokyo's recent forays in the currency market aimed to prevent sharp yen falls that inflate import costs and hurt consumption.
Last week, Japan's top currency diplomat, Atsushi Mimura, acknowledged the yen's rebound at the time as reflecting the country's solid economic fundamentals and prospects of a near-term interest rate hike by the central bank.
Japan has consistently, and successfully, urged G7 and G20 members to reaffirm their pact that excess volatility in the currency market is undesirable - language Tokyo sees as giving it justification for yen intervention when the currency's moves are too sharp and driven by speculative trade.
Trump's criticism of a weak yen and uncertainty on how his tariff threats could affect global growth may complicate the Bank of Japan's decision on how soon to raise interest rates.
Some analysts expect Trump's displeasure over a weak yen to work in favour of further interest rate hikes from the Bank of Japan.
“Japan can’t conduct yen-buying, dollar-selling intervention at current yen levels, so the pressure will pile on the BOJ to hike rates,“ said Hiroyuki Machida, director of Japan FX and commodities sales at ANZ.
“Trump’s comments give investors reason to buy yen” on bets the BOJ could raise interest rates twice this year, he said.
The central bank ended a decade-long, massive stimulus last year on the view that Japan was on the cusp of sustainably pulling out of prolonged deflation and economic stagnation.
With inflation exceeding its target of 2% for nearly three years, the BOJ is eyeing further interest rate hikes after raising borrowing costs to 0.5% in January.
A majority of economists polled by Reuters expect the BOJ to hike rates once more this year, most probably during the third quarter, to 0.75%.
