US-Japan relationship: Further clarity expected this week - Nomura

Yujiro Goto, Research Analyst at Nomura, explains that this week we should get further clarity on the US and Japan relationship under the Trump administration, as: 1) the high-level economic dialogue between the US and Japan begins (18-19 April), while 2) the G20 finance ministers meeting is also scheduled (20-21 April).   

Key Quotes

“US Vice President Pence in Japan. This will be the next important event to analyse the US and Japan economic relationship going forward. The dialogue will be led by Mr Pence and Japanese Deputy Prime Minister Aso, and it is expected to focus on three areas: 1) trade policy, 2) cooperation in infrastructure, energy and cyberspace; and 3) macroeconomic policy coordination (fiscal and monetary). In terms of trade policy discussion, the US is reported to want bilateral trade discussions (Jiji), while the Japanese government wants to emphasize the importance of multilateral trade negotiations, rather than bilateral ones. The latest USTR report listed trade barriers mostly in Japan’s agricultural and service sectors, such as the rice/wheat import system, high tariffs on citrus/dairy/processed food, and insurance. The report also commented on non-tariff barriers in the automotive sector, which may be on the agenda going forward.” 

“To avoid harsh trade policy discussions, we expect Japan to show its commitment to further investment in the US and to creating jobs there. In fact, Japanese automaker, Toyota, recently announced it was investing JPY150bn in US factories and President Trump praised the decision by stating “the announcement is further evidence that manufacturers are now confident that the economic climate has greatly improved under my administration.” These efforts should alleviate US criticism of Japan, while Japan may still need to show further commitment to investment in US infrastructure and import energy from the US. FX policy is not included on the agenda, but will be discussed by finance ministers. The imminent G20 finance ministers meeting means there should be only limited discussion of FX policy between Vice President Pence and Deputy Prime Minister Aso.”  

“The previous G20 finance ministers meeting did not change its exchange rate commitments. The communiqué repeated that “we will refrain from competitive devaluations and we will not target our exchange rates for competitive purposes.” This stance should not change materially, which will keep it difficult for both the US and Japan to intervene in the FX market. Japanese policymakers’ stance should remain unchanged, stressing that the BOJ’s monetary policy easing is aimed at supporting the domestic economy and exiting deflation, which would be beneficial for the global economy, including the US, via stronger domestic demand and imports.”