Shinzo Abe,Prime Minister of Japan
Feb 10th,US-Japan Summit
Japanese PM Shinzo Abe is reported to be preparing proactive proposals for boosting US growth ahead of his meeting with President Trump this week. If the Trump administration follows through on the President’s promises of significant fiscal expenditure, then the current account deficit is likely to widen, reflecting increased domestic demand, and the Dollar likely to appreciate due to rising interest rates. Although President Trump is likely to welcome Abe’s proposals he is known to be dissatisfied with the US’s current trade deficit with Japan and the weakness of the Yen.
Reuters is reporting that the Abe administration is working on a “Japan-US Growth & Employment Initiative†to be submitted at the Japan-US Summit on February 10th.The initiative is said to include plans to maximise Japan’s financial strength for developing US infrastructure as well as five policy packages including global infrastructure investment and US-japan collaboration in robots and AU and is intended to generate a $450bln market as well as create 700,000jobs.Financing from Japan is said to be coming from megabanks, government financial institutions, foreign exchange reserves and investment by the Government Pension Investment Fund (GPIF).
Effect on Currency Markets
If the report proves accurate then the financing, aside from the GPIF, is basically neutral for FX markets. However, any boost to US growth and employment should translate into a higher US Dollar. However, growth in US domestic demand suggests an increase in the current account deficit which should keep USD capped.When the US economy is performing strongly, foreign money inflows tend to outpace growth in the current account deficit, fueling cyclical USD strengthening. If railway aligned imports from Japan are added, President Trump’s issue with the US-Japan trade deficit is likely to continue.
In return for these proposals, PM Abe wants President Trump to affirm a strong US-Japan alliance. The US administration has also begun clarifying its emphasis on relations with Japan in terms of East Asia geopolitics. However, aside from the macro issues, the US President has regularly criticised Japan on specifics such as the trade imbalance and the exchange rate. PM Abe also wants President Trump to better understand the BOJ’s policy and the yen exchange rate, which are at the core of Abenomics.
