- In-depth What Trump Portends for Japan-US Relations
- How Trump Policies Affect the Japanese Economy
- [2017.04.06] Read in: 日本語 | FRANÇAIS | Русский |
Since Donald Trump’s election as US president, expectations of his economic policies have pushed up stock prices, interest rates, and the dollar. Economic expert Itoh Motoshige examines the significance of these policies for Japan.
Post-Election Yen Devaluation
Stock prices and exchange rates underwent a great shift from November 8, 2016, the day of the US presidential election. Following the day’s confusion in markets at the victory of Donald Trump, stock prices climbed significantly and the dollar rose against the yen. These movements reflected expectations about the Trump administration’s macroeconomic policies.
The policies are compiled in an easy-to-understand format in the white paper Scoring the Trump Economic Plan, published in September 2016 by Peter Navarro (now director of the National Trade Council) and Wilbur Ross (now secretary of commerce). It emphasizes energy policy reform to promote natural gas exports, decreased regulation of financial markets, dramatic reductions in business taxes, and greater infrastructure and defense spending.
Of course, these policies were floated during the heat of the election, and it is not clear whether they can actually be implemented, or what the Congress will agree to in the way of tax reductions and increased spending. If implemented, however, they would certainly provide a huge stimulus to the US economy, which is already close to full employment.
Based on these forecasts, US long-term interest rates soared immediately after Trump was elected. This led to a strengthening of the dollar, which from a Japanese perspective brought a weakened yen.
Trump’s Own Policies Strengthening Dollar
The economic package will also affect US monetary policy. On March 15, the Federal Reserve raised US interest rates, but the timing for that move was calculated from before Trump became president. The hike was the key to bringing an end to the ultralow interest rates and quantitative easing of the period following the 2008 financial crisis.
If Trump’s policies accelerate rises in prices and wages, interest rates will have to keep up. The Fed will be under the spotlight in terms of how frequently it hikes rates under the Trump administration.
In any case, though, the US economy is now seeing a trend of rising interest rates. While higher rates will help to prevent the economy from overheating, they will also exacerbate the strong dollar and weak yen, with complex effects on the Japanese economy.
President Trump regularly castigates Japanese, Chinese, and German monetary policy, seeking to keep the dollar from strengthening. This movement puts huge pressure on Japanese financial policy and management, as I expand on below. The greatest cause of the rising dollar, however, is not Japan, China, or Germany. It is the Trump administration’s own macroeconomic policies.
Responding to the Interest Rate Gap
The Bank of Japan has stuck to its drastic monetary easing guns in an effort to bring the Japanese economy out of deflation. There have been criticisms that its actions ultimately weaken the yen. Even so, Japan has maintained the stance that quantitative easing is essential to escaping deflation and is not conducted with the aim of manipulating exchange rates. At the same time, the BOJ has made changes to its policies.
There have been two major QE instances since Kuroda Haruhiko became BOJ governor in 2013. The continued commitment to buying long-term government bonds in large quantities sought to erase the market’s deflationary tendencies.
This policy enjoyed some success, but became gradually less effective from around 2015, when changes became apparent in the global economy. These included slowing down of the Chinese economy, slumping crude oil prices caused by general stagnation, and a deflationary trend in Europe. The Japanese consumption tax hike of April 2014 may also have been a factor.
In response, the BOJ shifted its focus last year from easing to interest rate adjustments. Its adoption of negative rates at the start of 2016 was followed by the introduction of yield curve control in September. The latter aimed to maintain the yields of 10-year bonds at close to 0%. While the BOJ has stuck to negative short-term interest rates, it has sought to encourage higher rates of long-term interest, so as not to put excessive pressure on the business of financial institutions.
Meanwhile, US long-term rates shot up after Trump’s election. They presently stand around 2.5%, far above Japan’s rates, which continue to hover near 0%. This gap has clearly pushed the dollar up against the yen. Before the election, the dollar stood at ¥100–¥105, but since late November it has risen to over ¥110. This is favorable for Japanese efforts to pull free of deflation, but there is also some wariness concerning further currency weakening. Trump’s criticism of what he calls Japan’s intentional devaluation is a factor here.
An exchange rate of ¥110–¥115 to the dollar is good for Japan, but further weakening would not benefit the country’s relationship with the United States or its economy. At the same time, it is difficult to know what the Trump administration will do next. After the president withdrew his support for the Republican-authored bill to repeal the Affordable Care Act—popularly known as Obamacare—on March 24, the yen rose. This can be seen as a response to market concerns over the new administration’s ability to enact its policies. So, it is necessary to consider the possible rise of the yen as well as its fall.
A key point regarding how interest rates affect the exchange rate is whether the BOJ continues to maintain long-term interest near 0%. This will no longer be necessary if US interest rates rise further and Japan is able to achieve stable inflation at over 1%. Such observations have not emerged from the BOJ as of yet, but Japan’s long-term interest will be under close scrutiny.
The most worrying aspect of the Trump administration is its protectionist stance. Immediately after becoming president, on January 23 Trump signed an executive order to withdraw the United States from the Trans-Pacific Partnership. His attacks on individual companies like Toyota also raise concerns about the trade course he intends to chart.
The Trump administration’s tax reform plan includes the introduction of a 20% border tax on imports. In Europe there is value-added tax of around 20% on goods, which this is also applied to US exports sold in Europe. When European goods are exported to the United States, they become VAT-exempt. This is the nature of the tax, but the Trump administration insists that it makes trade unfair. For this reason, it plans to impose the new border tax.
I do not know whether this policy will obtain the Congressional approval it needs to actually be implemented. If a 20% tariff is levied on imports, though, Japanese automakers—which export many vehicles to the United States from both Japan and Mexico—would suffer a serious blow. Some believe the sluggish share prices of Japanese car companies’ since Trump became president reflect this protectionist risk.
There is a high degree of uncertainty about Trump’s trade policy. If he does what he said on the campaign trail, Japanese industry could face tough times indeed. But some think he will not actually implement the promises he made during the election battle. This uncertainty leads to the gulf between the pessimistic and optimistic outlooks.
A New Free Trade Agreement?
Japanese companies remember the trade friction with the United States in the 1980s and 1990s. They know that they must be prepared to respond rapidly to unforeseen movements. Close dialogue at the governmental level is also key.
The biggest trade issues for the United States are with China and Mexico; America is unlikely to apply direct pressure on Japan for the moment. Based on the February meeting between Prime Minister Abe Shinzō and President Trump, a framework for US-Japan economic talks between Deputy Prime Minister Asō Tarō and US Vice President Mike Pence will also begin. This is a positive development. It is to be hoped that this will lead to ongoing discussions across a range of topics.
There will be keen interest in whether the two countries begin negotiations for a bilateral free trade or economic partnership agreement in place of the TPP. It would be hugely significant for Japan to enter such an agreement with the United States, its largest trading partner and investment destination. Whether Japan could enter negotiations that involve agriculture and other thorny political issues is difficult to foresee at this stage, however.
(Originally published in Japanese on April 5, 2017. Banner Photo: President Donald Trump, backed by Vice President Mike Pence and House Speaker Paul Ryan, speaks to a joint session of Congress at the Capitol in Washington, February 28, 2017. © The New York Times/Aflo.)
Professor in the Faculty of International Social Sciences at Gakushūin University. Honorary professor at University of Tokyo. Born in 1951. Graduated from the University of Tokyo and received his PhD in economics from the University of Rochester. Became a professor at the University of Tokyo in 1993 and taught at the Graduate School of Economics there from 1996 to 2016. President of the National Institute for Research Advancement from 2006 to 2014. Began his present position in 2016. Published works include Sangyō seisaku no keizai bunseki (Economic Analysis of Industrial Policy) and Keizai kiki wa sekai ni nani o motarashita ka (What the Economic Crisis Did to the World).
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