Rising yen bucks fundamentals, gives Japan a diplomatic breather | Reuters

By Shinichi Saoshiro

TOKYO The Japanese yen’s recent rise against the dollar has defied conventional market wisdom, but a stronger currency may actually support Japan as it confronts the Trump administration on matters of trade and foreign exchange.

The Federal Reserve’s explicit plan to raise interest rates this year, in stark contrast to the Bank of Japan’s persistently accommodative monetary policy, should in theory be a reason for investors to move out of the yen and seek yield in the greenback, the so-called carry trade.

However, growing investor doubts over President Donald Trump’s economic stimulus plans have hurt the dollar in recent weeks. Meanwhile, Japanese Prime Minister Shinzo Abe, now in a rare fifth year as leader, is battling scandals on two separate issues, driving funds into the safe haven yen.

While a stronger yen is typically bad news for Japan’s exporters, it provides some reprieve for an economy that the United States has accused of exploiting a cheap currency for growth.

“The Japanese authorities are aware of these trade threats and have been proactive in trying to manage the relationship with President Trump,” economists at Oxford Economics said in a report earlier this week.

And if the idea of a weak yen becomes a point of contention between the two countries, Japan could guide the yen to be stronger than Oxford Economics’ baseline projection of 118 to the dollar, they said.

The yen JPY= is now around 111 per dollar, the highs last seen just after Donald Trump was elected U.S. president in November. It hit 110.735 on Wednesday, its highest since late November.

Analysts expect the yen to remain strong.

“Dollar/yen should be around 114 considering current U.S.-Japan yield spreads, but it has drifted down to 111 on worries over political risks,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities.

Ishizuki expects the dollar’s value will fall towards 110 yen…

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