Japan’s currency tightrope with Trump

For years, U.S. President Donald Trump has accused Japan of engaging in “unfair trade practices” — a criticism that dates back to his days as a real estate mogul.

In March, Trump again singled out Japan, alleging that Tokyo weakened its currency to gain an unfair trade advantage. “I’ve called the leaders of Japan to say you can’t continue to reduce and break down your currency,” he said.

Then–Prime Minister Shigeru Ishiba reportedly told Japan’s parliament that the country was not pursuing a so-called “currency devaluation policy” — a point that his predecessors, including the late Shinzo Abe, had stressed in their meetings with Trump.

Now, as Abe’s protégé, Sanae Takaichi, is poised to helm the world’s fourth-largest economy, the same concern could be rearing its ugly head again.

Takaichi has been widely labeled as an apostle of “Abenomics,” the economic strategy of Abe, which espoused loose monetary policy, fiscal spending and structural reforms.

During last year’s ruling Liberal Democratic Party leadership race, she criticized the Bank of Japan’s plan to raise interest rates and, by extension, strengthen the yen.

Markets have responded with the so-called “Takaichi trade,” pushing the Nikkei 225 to record highs and weakening the yen to beyond the 150 mark against the dollar.

The 150-yen level is psychologically and politically sensitive. Japanese officials have previously warned or intervened in currency markets when the yen fell past that point, as it raises import costs and worsens the cost-of-living crunch for households.

A weak yen also revives one of Trump’s favorite talking points: that Japan benefits from an undervalued currency at the expense of the U.S.

However, analysts say that Takaichi is likely to tread carefully on economic policies to avoid straining relations with Washington.

Since the start of the year, the exchange rate between the U.S. dollar and yen has largely been rangebound, Hirofumi Suzuki, Chief FX Strategist at Sumitomo Mitsui Banking Corporation, said, noting that the yen hasn’t been on a downward slide.

“While the so‑called ‘Takaichi trade’ is currently tilted toward yen weakness in its early phase, it is not expected to persist for more than about a month and is regarded as temporary at this stage,” he said.

An impact on relations is not expected for now, Suzuki added. However, if the yen weakness continues to persist into the medium and long term, an impact on U.S.–Japan trade relations would be expected, he said.

Takahide Kiuchi, a former Bank of Japan policy board member, believes that the Trump administration is already wary of the yen’s weakness.

“While I do not believe this will nullify the Japan-U.S. agreement, it is possible that the Trump administration will ask Japan to correct the yen’s weakness,” Kiuchi, an executive economist at Nomura Research Institute, pointed out.

While a weak yen is great for exporters — which make up a huge portion of the Nikkei 225 and are a key driver of Japanese GDP growth — it also raises import prices and may increase imported inflation in the country.

Last year, Japan’s currency hit a 34-year low of 161.96 to the dollar, even after repeated interventions by authorities. Before Takaichi won the presidency of the LDP, the yen had strengthened by about 6% against the dollar since the start of the year to 147.44. It has since weakened to 152 on Thursday, trimming its year-to-date gain to 2.77%.

Norihiko Yamaguchi, Lead Japan Economist at Oxford Economics, said that concerns over imported inflation will keep Takaichi from enacting policies that would push the yen lower.

As such, he thinks that the prospective prime minister would have to be “more realistic” in her policy stance.

Despite Takaichi’s opposition to rate hikes, Yamaguchi expects the BOJ to hike rates once in December and again in mid-2026, and that market pressures — especially the weakening of the yen — will leave her with no choice but to accept some rate hikes.

This is because rate hikes will be needed to curb inflation, experts told CNBC, which has run above the BOJ’s 2% target for over 3 years in a row. Japan’s latest headline inflation figure for August came in at 2.7%.

“Inflation will decide whether or not she has a job in 12 months,” William Pesek, the author of Japanization: What the World Can Learn from Japan’s Lost Decades, told CNBC “Squawk Box Asia” on Monday.

Jesper Koll, expert director at Monex Group, agreed, saying that Takaichi will eventually need a stronger yen to get inflation down. “[The] loss of people’s purchasing power is the number one reason the LDP is unpopular.”