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President Trump proposed currency clauses in trade treaties to the consternation of U.S. trading partners.   © Reuters
Economy

Trump set to slap currency stipulations on trade deals

Pressure on two fronts gives Japan jitters over monetary policy

TAKESHI KAWANAMI and RYO NAKAMURA, Nikkei staff writers | China

WASHINGTON -- U.S. President Donald Trump pledged Thursday to make "strong controls over monetary manipulation and devaluation" part of trade talks, a highly unusual move that could sink deals with countries such as Japan that consider intervention part of their tool kit.

Eye on public opinion

Trump's comments came as a "huge shock," a dismayed Japanese trade representative said Friday. Trade negotiations typically center on tariff cuts and related rules. Inserting safeguards on currency manipulation into a trade deal, as Trump has proposed, would be unprecedented.

Washington floated such a proposal during Trans-Pacific Partnership talks in a nod to concerns among U.S. lawmakers, only to have it shot down by Japan as well as Malaysia and Singapore, which engage in currency intervention. As a compromise, TPP members agreed to have representatives meet regularly to discuss currency policy.

Japan will make "the same arguments" on anti-manipulation measures during bilateral negotiations as during the TPP talks, Chief Cabinet Secretary Yoshihide Suga told reporters Friday. Though rumors are swirling in Washington about a proposal to label China a currency manipulator and impose punitive tariffs, the details remain unclear. Even the definition of "currency manipulator" is still hazy.

Currency issues are a major factor behind Trump's decision to "permanently withdraw" the U.S. from TPP talks. The president is taking such a hard line because the argument that a strong dollar is bad for the American job market goes over well among voters.

The manufacturing sector is on the same page with Trump on this point. Major automakers, which have been losing market share to Japanese cars, criticized the TPP for failing to sufficiently address currency manipulation.

Risking contradictions

But if the U.S. tries to tie other nations' hands on currency policy, it will be unable to get countries that frequently intervene in currency markets, such as Singapore, to the negotiating table. Developed countries such as Japan are unlikely to agree to such stipulations, which would cause talks to run aground.

Writing its own currency rules would leave the U.S. at odds with the Group of 20 and the International Monetary Fund. The IMF tolerates currency intervention under certain conditions on the grounds that excessive volatility can hurt a country's economy. The Group of Seven advanced economies, including the U.S., coordinated in 2011 to counteract a yen surge in the wake of the earthquake and tsunami that struck Japan.

Having the country behind the world's main reserve currency impose rules that are inconsistent with international agreements would create a double standard. This could not only throw currency markets into chaos, but also break currency pegs against the dollar and accelerate flight from the greenback.

Tokyo and Washington are arranging a summit to be held as early as Feb. 10. Trump's approach to currency issues will be a point of particular interest. Japan says it has avoided intervening in the currency market since the fall of 2011.

A Japanese government insider acknowledged the possibility that Washington could go so far as to call the Bank of Japan's monetary easing a form of manipulation. Unlike the U.S. Federal Reserve, which seeks to raise interest rates further, the Japanese central bank is trying to keep long-term rates around zero. This divergence puts upward pressure on the dollar.

The G-20 tolerates monetary easing intended to strengthen a country's economy. But if the U.S. gets too aggressive on reining in the greenback's appreciation, the Japanese government and the BOJ could be left with fewer options, some market players argue.

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