By Leika Kihara and Yoshifumi Takemoto
TOKYO (Reuters) -A narrowing U.S.-Japan interest rate gap, rather than any effort by President Donald Trump to weaken the dollar, will likely lift the yen to around 135-140 against the U.S. unit by year-end, Japan’s former top currency diplomat said on Friday.
Markets are rife with speculation that Trump – who in the past accused Japan and China of currency manipulation – will pressure Tokyo to help weaken the dollar against the yen to give U.S. exports a trade advantage.
Mitsuhiro Furusawa, a former currency diplomat who retains close ties with Japanese and overseas incumbent policymakers, said it was unclear whether the Trump administration was explicitly taking a weak-dollar policy.
“It’s not easy for policymakers to intentionally weaken the dollar,” Furusawa said in an interview.
“Having made clear that tariffs are the main tools (for negotiation), I don’t think Washington needs to rely much on currencies to achieve its goals,” said Furusawa, who also served as the International Monetary Fund’s deputy managing director until 2021.
Still, the U.S. likely wants to avoid further dollar rises from hurting exports, Furusawa said. Japan, for its part, wants to prevent a weak yen from pushing up inflation, he said.
“As such, they are eye-to-eye on this front. That means the yen will likely rise gradually,” said Furusawa.
The diverging monetary policy direction between Japan and the U.S. will also prop up the yen with the Federal Reserve’s next move seen as an interest rate cut, while the Bank of Japan (BOJ) eyes further rate hikes, Furusawa said.
BOJ Governor Kazuo Ueda has said the bank will continue raising rates if economic improvements keep inflation on course to durably hit its 2% target, though he has signaled a pause until there is more clarity on the fallout from Trump’s tariffs.
“If Japan succeeds in reaching a broad trade agreement with the U.S. possibly at this month’s G7 summit, that will reduce uncertainty,” Furusawa said. Real wages will also rise and underpin consumption once food inflation dissipates, he said.
“If we see such positive developments, the BOJ could hike rates again in the latter half of this year,” Furusawa said, adding the yen “will likely strengthen to around 135-140 to the dollar by year-end.” The yen stood around 143.90 to the dollar in Asia on Friday.
The BOJ probably wants to eventually raise its short-term policy rate target – currently at 0.5% – above 1%, though there is uncertainty on whether it would succeed, said Furusawa, who is currently president of Sumitomo Mitsui Banking Corp’s Institute for Global Financial Affairs.
Japan is continuing trade talks with the U.S. with a focus on gaining concessions on automobile tariffs. Domestic media has reported the two sides may seek to clinch a deal in time for the G7 summit on June 15-16.
Finance Minister Katsunobu Kato caused a stir last month when he said Japan could use its $1 trillion-plus holdings of U.S. Treasuries as a card in trade talks with Washington. He later said Tokyo had no plan to threaten selling U.S. Treasuries.
Furusawa said it was natural for Japan, as a negotiating tactic, to say all options were on the table. But whether Japan can actually use it as a bargaining tool was questionable, partly as threatening to sell U.S. Treasuries could backfire by angering Trump and derailing trade negotiations.
(Reporting by Leika Kihara and Yoshifumi Takemoto; Editing by Sam Holmes)
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