Japan-US summit preview - Deutsche Bank

Taisuke Tanaka, Strategist at Deutsche Bank, noted, "Prime Minister Shinzo Abe appears to be preparing pro-active proposals for President Trump to boost US growth and employment. If the Trump administration delivers on its promised aggressive fiscal policy, we can expect the current account deficit to widen (reflecting expanded domestic demand) and the dollar to strengthen owing to rising interest rates. If Japan's proposals prove effective, we think they would be certain to at least reinforce this change. While President Trump will likely welcome Japan's proposals, he will very likely hold dissatisfaction over the trade deficit against Japan and the weak yen."

Key Highlights:

•As part of his report, Tanaka reviewed the following content from the wires: Reuters has reported that Abe administration is preparing a "Japan-US Growth Employment Growth Initiative" for Japan-U.S. Summit on 10 February. It apparently, involves maximizing Japan's financial strength for US infrastructure development and five policy packages including global infrastructure investment and US-Japan collaboration in robots and AI, and is aimed at creating a $450bn market and 700,000 jobs. Financing from Japan will reportedly be from the megabanks, government financial institutions, foreign exchange reserves, and investment by the GPIF.

•If the report is accurate, we see financing ex. the GPIF as basically currency neutral. However, we think any positive impact on US growth and employment would likely reinforce the dollar's upward trajectory. At the same time, growth in US domestic demand would suggest an increase in the current account deficit.

•When the US economy is strong, foreign money tends to flow in at a pace topping growth in the current account deficit, thus contributing to cyclical dollar appreciation. If railway-related imports from Japan are added in, President Trump's dissatisfaction with the US's trade deficit with Japan can continue.

•In return for Japan's proposals, Prime Minister Abe wants President Trump to commit to a strong Japan-US alliance. The US administration has also started to clarify its emphasis on relations with Japan in terms of East Asian geopolitics. However, apart from these comprehensive and macro-issues, President Trump has often criticized Japan on specifics such as the trade imbalance and the exchange rate.

•The Clinton administration, which regarded Japan as the greatest economic threat from 1993 to 1995, frequently used the strong-yen bluff in Japan-US trade negotiations. When the dollar's typical depreciation at the onset of an interest rate upcycle coincided with the major events of the Mexican crisis and the bursting of Japan's economic bubble, the dollar/yen fell steeply and for a sustained period. Japan is still traumatized by this recollection and is nervous about what President Trump is saying.

•After correcting at the low 110 level recently, the dollar/yen cycle will move toward 120-125 as fiscal policy accelerates US growth to 3-4% from 2017 into 2018 and the Fed hikes policy rate repeatedly. However, a level above 120 would be politically sensitive, and we cannot exclude the possibility that the Japanese authorities may start talking about self-restraint regarding yen depreciation before the currency reaches 120. Coming dollar/yen appreciation will unlikely be unidirectional. We recommend building long positions by buying on decline strategically at around 110 and tactically at over-115 level.

USD/JPY analysis: bearish trend intact, lower lows at sight