For all his tough-guy bluster at home, Japan’s Shinzo Abe has been a complete pushover for Donald Trump. Nine days after US President Trump’s shock election in November 2016, Prime Minister Abe scurried to New York’s Trump Tower to pledge his allegiance, the first world leader to do so.
Abe even ignored Trump’s breach of diplomatic etiquette in bringing his children to the meeting.
Abe then pretended not to notice Trump’s withdrawal from the Trans-Pacific Partnership, his scrapping of the Paris climate accord and his violating the Iran nuclear deal.
The Japanese premier largely held his tongue as Trump slapped tariffs of 25% on steel, 10% on aluminum and, now, US$200 billion of additional levies on goods from China, Tokyo’s main export market. That’s on top of an earlier US$50 billion.
But Abe does appear to have a red line after all: exchange rates.
On Sunday, Abe disclosed that he’s told Trump to go easy on talk of a weaker dollar. Abe claimed that Trump has avoided talking about the dollar-yen rate at Abe’s request. A stronger yen, Abe says he stressed to Trump, would scuttle Japan’s reflation efforts, hurting global demand.
There’s only one problem: Trump is dying to go to the one place where Abe says “no.” In fact, Abe is in denial if he thinks Trump and US Treasury Secretary Steven Mnuchin aren’t working behind the scenes to cap, if not actively weaken, the dollar.
On Aug. 20, Trump told Reuters: “I think China’s manipulating their currency, absolutely,” adding: “I think the euro is being manipulated also.” He also took aim at his own hand-picked Federal Reserve Chairman Jerome Powell. “I’m not thrilled with his raising of interest rates, no.” Instead, Trump said: “I should be given some help by the Fed. The other countries are accommodated.”
Abe’s team is naive to think Japan isn’t among the “other countries” Trump is stewing about. In early 2017, remember, he took to Twitter and attacked the yen. He also slammed Toyota’s decision to build a new factory in Mexico rather than the US. Japan Inc is hardly above Trump’s reproach.
The real question is how Tokyo responds when Trump and Mnuchin go all-in for a weaker greenback? That might seem unnecessary at the moment, with US growth about 4% and unemployment below that level.
Yet two potential trigger points are worth keeping an eye on. One, Trump growing frustrated with Abe’s reluctance to strike a bilateral trade deal with Washington. Two, all hell breaking loose with Trump’s fast-increasing number of scandals and investigations of his inner circle and family.
The first challenge will confront Abe right out of the gate in his third term, one he’s sure to secure in Thursday’s Liberal Democratic Party contest. Since reneging on the TPP, Trump has pressured Tokyo to engage in direct negotiations. Abe has done his best to keep the peace – talking with Washington while trying to sell Trump on rejoining the TPP fold.
It’s a staring contest, though, one that could go awry at any moment. Among the many wildcards is a bull market in scandals and investigations Trump’s 606-day presidency has produced. Perhaps it’s just a coincidence, but with each indictment Special Counsel Robert Mueller drops, Trump ratchets up attacks on world trade.
With approval ratings in the 30s and Congressional elections in November, Trump’s legislative prospects are nil. That’s driven him to sign myriad executive orders, a disproportionate amount of which attempt to throw sand into the gears of Asia’s export engine.
Officials in Tokyo, Seoul and elsewhere in Asia must brace for how a caged and paranoid Trump White House might lash out in their direction. Not just via Twitter, but assertive moves to weaken the dollar. That, of course, could lead to other sources of market turbulence, including making the trillions of dollars of US Treasuries that Asian governments own less attractive.
Abenomics bulls hope Abe will use his third term to deregulate the economy. That becomes less likely, though, if Trump crosses Abe’s red line. Japan pundits have long buzzed about what might break up the Abe-Trump bromance. You can almost bet your bottom dollar it’ll be over a yen rate Abe needs to keep as low as possible.