Japan's Economy & Sanae Takaichi: Trump and the Yen - Are Trade Tensions Returning?

Will Trade Tensions Between Japan and the US Resurface?

For years, former US President Donald Trump has accused Japan of engaging in "unfair trade practices," criticisms that date back to his days as a real estate mogul. Now, with Sanae Takaichi, an advocate for specific economic policies, potentially taking the helm of the world's fourth-largest economy, these concerns may resurface.

Takaichi and "Abenomics"

Takaichi is considered a proponent of "Abenomics," an economic strategy that calls for loose monetary policy, fiscal spending, and structural reforms. During the ruling Liberal Democratic Party's (LDP) presidential election last year, she criticized the Bank of Japan's (BOJ) plans to raise interest rates and strengthen the Yen. Markets reacted to this with the so-called "Takaichi trade," which pushed the Nikkei 225 index to record highs and drove the US dollar-Japanese Yen exchange rate above the 150 level.

The 150 Level: A Political and Economic Red Line

The 150 level is considered a psychologically and politically sensitive point for Japanese officials. Previously, Japanese officials have warned about or intervened in currency markets because a weaker Yen below this point increases the cost of imports and exacerbates the cost-of-living crisis for households.

Fears of Rehashed Trump Criticisms

The weak Yen also resurrects Trump's favorite old refrain: that Japan benefits from an undervalued currency at the expense of the US. However, analysts suggest that Takaichi may act cautiously in economic policy to avoid tensions with Washington.

Strategic Analysis: Between Political Realism and Economic Pressures

Hirofumi Suzuki, chief FX strategist at Sumitomo Mitsui Banking Corporation, points out that the US dollar-Japanese Yen exchange rate has remained largely within a range this year and that the Yen has not steadily declined. "Although the 'Takaichi trade' initially leaned towards a weaker Yen, it is not expected to last for more than about a month and is currently considered temporary," he adds.

Potential Impact on US-Japan Relations

Suzuki anticipates that there will be no immediate impact on relations between the two countries. However, he notes that if Yen weakness persists over the medium to long term, it is expected to affect US-Japan trade relations.

The Need for Balance: Supporting Exports vs. Curbing Inflation

While a weaker Yen is considered good for exporters, who make up a significant proportion of Japan's economic growth and are a key driver of the Nikkei 225 index, it also pushes up import prices and may increase imported inflation in Japan.

Challenges for Takaichi: Inflation and Monetary Pressures

Norihiko Yamaguchi, chief Japan economist at Oxford Economics, believes that concerns about imported inflation will prevent Takaichi from formulating policies to further devalue the Yen. Therefore, he believes that the prospective prime minister must be "more realistic" in her policy stance.

Expectations of Interest Rate Hikes

Despite Takaichi's opposition to interest rate hikes, Yamaguchi expects the BOJ to raise interest rates once in December and again in mid-2026. He argues that market pressure, particularly a weaker Yen, will leave her with no choice but to accept some interest rate increases. Many experts agree that Japan needs to raise interest rates to curb inflation, which has exceeded the BOJ's 2% target for more than three years. Japan's latest overall inflation figure for August was 2.7%.

Takaichi's Political Future

William Pesek, author of "Japanization: What the World Can Learn from Japan's Lost Decades," says that "inflation will determine whether she keeps her job in 12 months." Monex Group expert Jesper Koll agrees, believing that Takaichi will eventually need a stronger Yen to lower inflation. "The public's falling purchasing power is the number one reason why the LDP is unpopular."