USD/JPY struggles with what to make do of US-Japan trade deal

The Japanese yen gained on Trump’s initial announcement but quickly gave all of that back before pushing higher again later on. But now, it is settling back lower again as traders continue to digest what to make of Japan’s trade deal with the US. It’s all looking rather messy at the moment so let’s try and break it down to see what that is the case.

In broader markets, the Nikkei is surging higher with over 3% gains while Japanese bond yields have also jumped up. The former is finding relief that trade negotiations might finally be settled while the latter appears to be focusing on the fact that we might see the BOJ get back on track with rate hikes.

So, what about the Japanese yen?

One can argue that a mix of the two reasons above should lend a helping hand in keeping the currency bid. That especially with a shot higher in short-term JGB yields as well, reaffirming the uplift in BOJ expectations. However, the thing to be wary about is political risks and that might be what is holding the yen back.

As things stand, Japan prime minister Ishiba’s position is still not safe. Him bringing back this trade deal seems to be a last ditch effort to stave off political pressures. But come what may, that might not work and we could still see a snap election in Japan.

What will then happen to the trade deal?

The main sticking point for me is that Ishiba offered to make concessions on agriculture, agreeing to accept more rice from the US. This comes after months of having said that he will not concede on that matter. So, why the sudden change?

If he brought back the deal before the upper house election, it might’ve helped his standing a bit more. But now, this just makes him look like a lame duck.

The bigger question though is will lawmakers go with the flow or decide to go up against Ishiba’s proposal for a deal? Remember, the National Diet still has to ratify and approve any agreements – including trade – brought back by the government.

So, this might not be Ishiba’s saving grace and is perhaps what is keeping yen traders more guarded in the reaction we’re seeing.

This article was written by Justin Low at investinglive.com.



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