As Washington pushes to include foreign exchange (FX) issues in the U.S.-Japan bilateral trade talks, the markets' focus on potential turning points in U.S.-Japan trade relations is rapidly intensifying. Japanese Finance Minister Katsunobu Kato is expected to meet with U.S. Treasury Secretary Scott Besant for a second round of trade talks in Washington this week.
Although currency issues were not formally scheduled during the visit by Japan's Economic Revitalization Minister Ryo Takeda to the U.S. last week, Citibank noted that Besant has expressed a desire to include currency discussions in U.S.-Japan trade negotiations. This move has sparked speculation about a possible "Plaza Accord 2.0," recalling the 1985 Plaza Accord that resulted in a significant appreciation of the yen against the dollar.
Citigroup strategists believe that the possibility of a broader multilateral currency arrangement akin to the "Ma'alago Accord" is unlikely at present, but a bilateral currency discussion between the U.S. and Japan appears more feasible. Citigroup anticipates that the U.S. may have an internal target range of 100 yen to 1 dollar, while Japan might agree to a gradual yen appreciation to 130, ultimately reaching a compromise at 120 yen per dollar.
Referring to the historical experience of the 1985 Plaza Accord, the goal at the time was a 10%-12% decline in the dollar against the yen, with an initial target set at 200 yen per dollar. However, the currency quickly broke through this level within three months, and by the end of 1987, the dollar had further fallen to 120 yen, far exceeding expectations.
However, Citigroup also warns that the current financial and economic environment is significantly different from the mid-1980s. Besant's background focuses more on market operations, in contrast to the legalistic approach of then U.S. Treasury Secretary James Baker. Therefore, Citigroup believes Besant is unlikely to take direct action in the forex market, and is more likely to encourage the Bank of Japan to gradually normalize monetary policy, thereby strengthening the yen through internal policy adjustments.
Despite increasing external attention, Citigroup assesses that the likelihood of reaching a specific currency agreement in the short term is low. If Japan makes broader concessions in other fields, the U.S. may offer some leniency in tariff policies, yet it is anticipated that no market-impacting foreign exchange announcement will be made following this week's finance ministers' meeting.
Currently, the dollar-yen exchange rate is approaching the technical support level of 140, with recent depreciation exceeding market expectations. Citigroup expects a potential short-term rebound testing the 145 level, but maintains a bearish stance on the dollar-yen in the medium to long term, forecasting further appreciation of the yen in the future.
