USD/JPY clings to support as US-Japan trade talks come into focus
- USD/JPY edges lower on broad-based US Dollar weakness.
- Tariff threats reemerge ahead of upcoming talks between the United States and Japan.
- The G7 meeting in Canada on Sunday sets the stage for USD/JPY’s next big move.
The Japanese Yen (JPY) and the US Dollar (USD) share a complex relationship, with the interests of the two global powerhouses intertwined in the USD/JPY pair.
With USD/JPY currently trading at a critical juncture around the 144.00 psychological level, 0.65% down on Thursday, tensions between the two nations have come into focus.
While USD/JPY is one of the most widely traded forex pairs, Thursday’s price action appears to be driven more by underlying geopolitical sentiment than by technical factors alone.
As the largest foreign holder of US Treasuries, Japan has opposed US President Trump's tariff policies, which include 50% duties on steel and aluminum imports and 25% tariffs on automobiles and auto parts. High tariffs on Japan’s key exports, including steel, aluminum, and car parts, are placing pressure on the Japanese economy, contributing to rising inflation.
With the two nations preparing for the Group of Seven (G7) meeting in Canada, talks are expected to take place in an effort to reach some form of trade agreement.
With the two nations preparing for the Group of Seven (G7) meeting in Canada, talks are expected to take place in an effort to reach some form of trade agreement.
During a testimony before the House Ways on Wednesday, US Treasury Secretary Scott Bessent stated that "There are 18 important trading partners — we are working toward deals on those — and it is highly likely that those countries that are ... negotiating in good faith, we will roll the date forward." Japan has been mentioned as one of the countries with which the US is actively negotiating.
Although Trump continues to express the need for other countries to make a deal with the US, Japanese Prime Minister Shigeru Ishiba remains committed to ensuring that Japan gets a fair deal. Ryosei Akazawa, the chief trade negotiator for Ishiba, is anticipated to head to North America later this week for the sixth round of talks with his counterparts.
On Thursday, Bloomberg reported comments made by Ishiba in Tokyo at a meeting where Japanese leaders gathered to discuss the situation with the US.
“If there’s progress before I meet the president, that’s in and of itself good,” he stated.
He followed up by stating, “What’s important is to achieve an agreement that’s beneficial to both Japan and the US. We won’t compromise Japan’s interests by prioritizing a quick deal.”
For USD/JPY, the recent weakness in the pair can be attributed to a rise in USD outflows that have favoured alternative currencies. With trade talks in focus, these negotiations could contribute to the pair’s near-term move, especially if Japan uses its holdings in US Treasuries as a negotiating tool against the US.
Tariffs FAQs
Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.
Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.
There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.
During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.
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