Japan Unlikely to Face U.S. Pressure on Yen Despite Trade Deficit Concerns, Says Ex-FX Diplomat

Economic

Forex

Summary:

Despite President Trump's renewed criticism of Japan’s trade surplus and currency weakness, former FX diplomat Masatsugu Asakawa believes Washington is unlikely to pressure Tokyo to strengthen the yen or coordinate a dollar depreciation.

Currency Policy Unlikely to Be a Target in U.S.–Japan Trade Tensions

Masatsugu Asakawa, Japan’s former vice finance minister for international affairs and a seasoned currency negotiator, has dismissed speculation that the United States will push Japan to strengthen the yen in the current trade negotiation climate. While President Trump has publicly criticized Japan for maintaining a weak currency amid a significant trade surplus, Asakawa noted that exchange rate matters remain largely within the purview of finance officials and are unlikely to become bargaining chips in trade talks.

This view reflects a continuation of past diplomatic strategy. During Trump's first presidential term, Japanese Prime Minister Shinzo Abe succeeded in persuading the U.S. to isolate currency policy from broader trade negotiations. That precedent, Asakawa said, appears to remain intact, with no active discussions between U.S. Treasury Secretary Scott Bessent and Japanese Finance Minister Katsunobu Kato on currency realignment.

Limited Likelihood of Coordinated Currency Intervention

The idea of a coordinated effort to weaken the U.S. dollar similar to the 1985 Plaza Accord was also dismissed by Asakawa as implausible. A coordinated depreciation would require alignment not just with Japan, but also with China and the European Union, which is currently lacking. Despite the dollar’s recent weakness, falling 11% in the first half of 2025 and 7.5% against the yen alone, there is no indication that such alignment exists or is being pursued through formal channels.

The declining dollar has been partially attributed to investor concerns following Trump’s sweeping tariff plans announced in April, which have since sparked global trade frictions. A weaker dollar theoretically benefits U.S. exports, but prolonged depreciation could increase domestic inflation a risk that policymakers like Bessent are likely cautious about.

Japan's Strategic Options in Bilateral Negotiations

Asakawa acknowledged that Japan still faces risks from Trump’s tariff escalation strategy. On Monday, the U.S. announced that tariffs on Japanese goods would rise to 25% from the previous 10%, unless a deal is reached before the August 1 deadline. However, he emphasized that Japan retains several strategic options that could help in negotiations, including promises to increase U.S. investment, relax domestic automotive safety regulations, and support American energy projects such as LNG development in Alaska.

He suggested that presenting these offers as a unified package, rather than in piecemeal fashion, would improve Japan’s leverage and negotiating clarity. This tactic mirrors the structured and high-stakes style of past U.S.-Japan economic dialogues, where timing and presentation often mattered as much as content.

Currency Matters Remain Technocratic, Not Political

At the core of Asakawa’s assessment is the distinction between trade politics and currency governance. While Trump frequently invokes exchange rates in public rhetoric linking currency weakness to unfair trade advantages the operational responsibility still lies with finance ministries and central banks, which typically follow more rules-based approaches. There is no formal evidence that the U.S. is pursuing a bilateral agreement with Japan on currency values, nor is there an international framework currently being discussed to cap yen depreciation.

The dollar index’s sharp slide this year reflects broader global monetary dynamics, not just bilateral frictions. Yen strength is more a byproduct of global capital flows and shifting interest rate expectations than targeted manipulation. Hence, even with Japan’s trade surplus in focus, any direct U.S. pressure to appreciate the yen would likely face institutional resistance.

Although Japan remains a potential target in Trump’s aggressive trade agenda, currency realignment is unlikely to become a central demand. Asakawa’s insights suggest that policymakers on both sides continue to treat exchange rate policy as a technical issue rather than a political lever. As Japan prepares its negotiating stance ahead of the August 1 tariff deadline, its strategy will likely focus on offering economic incentives and maintaining policy discipline rather than conceding ground on the yen’s valuation.

Source: Reuters

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Forex

Dollar Softens Amid Lower Yields and Diminished Tariff Shock

On Thursday, the U.S. dollar index declined 0.1% to 97.286 after touching a two-week high the previous day. The pullback followed a strong 10-year Treasury auction that pushed yields lower and calmed investor fears surrounding “Sell America” sentiment seen earlier this year. As Treasury yields dropped, so did the dollar’s appeal, especially in the absence of further macroeconomic shocks from President Trump’s new wave of tariff threats.

Although Trump issued additional tariff letters this week including an unexpected escalation to 50% on Brazilian goods most of the new tariffs mirrored the earlier "Liberation Day" announcement on April 2 and were largely priced in. Markets outside Brazil largely shrugged off the news, reinforcing investor expectations that the worst-case trade scenarios are unlikely to materialize.

Brazilian Real Slides on Political-Driven Tariff Threat

Brazil’s real was the outlier. Following Trump’s threat to impose a 50% tariff on Brazilian exports by August 1, the currency sank as much as 2.8%, hitting 5.6047 against the dollar its lowest level since June 6 before recovering slightly to 5.5826. Unlike other tariff announcements that focused on trade imbalances, Trump’s Brazil move was motivated by political disapproval over former president Jair Bolsonaro’s trial.

This politically charged approach added volatility to Brazilian markets and underscored Trump’s willingness to leverage tariffs as a tool for non-economic disputes. The market response also reflected Brazil's unique trade relationship with the U.S., where the U.S. actually maintains a trade surplus, implying Brazil’s retaliation could impact key American exporters.

Bitcoin Nears Record on Risk-On Sentiment

Investor risk appetite improved significantly, helping Bitcoin rise 0.3% to $111,114 just shy of its overnight record of $111,988.90. Optimism around broader market stability, alongside dovish signals from the Federal Reserve minutes suggesting rate cuts later this year, supported the bullish momentum in crypto assets.

Bitcoin’s resilience appears linked to the diminishing likelihood of disruptive global trade outcomes. According to IG’s Tony Sycamore, while the latest rally lacked explosive upside so far, conditions remain favorable for Bitcoin to test the $120,000 mark in the near term, especially if macroeconomic uncertainty continues to ease.

Market Currencies Move in Step with Lower Dollar Pressure

The euro gained 0.2% to $1.1747, while the British pound climbed to $1.3612, reflecting investor rotation away from the dollar. Safe-haven currencies also moved, with the yen strengthening to 145.84 per dollar and the Swiss franc appreciating to 0.7922 per dollar. These moves suggest modest rebalancing across FX markets as investors reassess risks following a relatively subdued reaction to Trump’s trade actions.

While Trump’s trade rhetoric remains aggressive, especially in the case of Brazil, the global market response has been relatively restrained. The dollar’s retreat alongside lower yields points to stabilizing investor sentiment. Bitcoin’s near-record high and gains in major currencies further signal confidence that geopolitical frictions may remain contained. However, Brazil’s currency plunge illustrates that politically motivated trade interventions can still provoke sharp localized reactions and may become more frequent as election-year strategies unfold.

Source: Reuters

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Economic

Escalating Diplomatic Pressure Through Trade Policy

President Donald Trump’s recent letter to Brazilian President Luiz Inácio Lula da Silva has sparked a fresh international dispute, as the U.S. threatens to impose a punitive 50% tariff on Brazilian goods unless the country halts what Trump calls a “witch hunt” against former President Jair Bolsonaro. Unlike other tariff threats linked to trade imbalances, this one stems from political grievances regarding Bolsonaro’s trial, marking a rare instance of U.S. trade pressure explicitly tied to the internal judicial affairs of a foreign nation.

Trump’s demand, published on his Truth Social platform, diverges from previous tariff communications that emphasized trade deficits. This time, the issue is Bolsonaro’s legal exposure over alleged coup plotting following the 2022 election loss, for which he is now standing trial in Brazil. Lula responded strongly, invoking Brazil’s Law of Economic Reciprocity and warning that any unilateral tariff escalation would be met with retaliation.

Unique Trade Dynamics Amplify Tensions

The threat against Brazil is distinctive. In contrast to the 21 other countries that received tariff letters this week, Brazil had not previously been targeted in the reciprocal tariff list announced in April. Moreover, the U.S. runs a trade surplus of $6.8 billion with Brazil, meaning the U.S. exports more to Brazil than it imports. This surplus implies that any retaliatory tariffs from Brazil could disproportionately harm American exporters particularly in agriculture, machinery, and chemicals raising the potential for economic blowback within the U.S.

This situation highlights a deviation from Trump’s usual rationale, which tends to center on trade imbalances. Instead, the tariff threat functions more as a political instrument intended to influence foreign legal proceedings. While similar methods were used earlier this year with Colombia successfully coercing a reversal on deportation policy Brazil’s firm response indicates such tactics may now face stronger resistance from nations asserting judicial independence.

Copper Tariffs Justified Under National Security Claims

On the same day, Trump unveiled a 50% tariff on copper imports, citing national security concerns. This move followed an executive order signed in February mandating the Commerce Department to assess the risks associated with foreign copper dependence. Copper, crucial for semiconductors, batteries, and defense equipment, is widely used by the Department of Defense. Trump framed the tariff as necessary to rebuild a “dominant” American copper industry, branding current import levels as a strategic liability.

The market reaction was immediate. Copper futures spiked 13.1% on Tuesday to a historic $5.69 per pound its largest single-day surge on record before retracing slightly the following day. The sudden rise reveals a strong correlation between tariff announcements and commodity price behavior, reflecting how policy signals alone can reshape market expectations.

However, analysts remain skeptical about the feasibility of reviving domestic copper production in the short term. The U.S. currently imports more than half its copper, primarily from Chile, China, Japan, and Congo. With no clear development plans or major projects under construction, tariffs are unlikely to bridge the structural supply gap. As Saxo Bank's Ole Hansen noted, the new tariff functions more as a consumer tax, potentially making U.S. manufacturing and infrastructure projects more expensive due to input cost inflation.

Unfolding Tariff Campaign Expands to More Countries

Trump’s tariff escalation appears to be part of a broader campaign. This week alone, he sent tariff letters to 22 countries, with rates as high as 50%. Nations such as the Philippines, Moldova, Libya, and Iraq have been placed on notice, with tariff levels adjusted either upward or downward compared to earlier threats. While many of these moves are framed as tools to correct trade imbalances or push back against perceived unfair treatment of American goods, the political undertone in Brazil’s case stands out.

Trump has made it clear that companies based in these countries can avoid tariffs by relocating manufacturing to the U.S., continuing a pattern of using tariffs as leverage to drive reshoring. However, such proposals have met with mixed reception internationally and have yet to yield significant deal-making. Lula’s defiant response to the Brazil threat suggests that diplomatic friction may be intensifying rather than subsiding.

Trump’s dual announcements the Brazil tariff threat over judicial proceedings and the copper tariff based on national security signal a sharp broadening of U.S. trade policy objectives. No longer focused solely on economic metrics, tariffs are now being used as direct tools of geopolitical influence and domestic industrial policy. While these moves may score points with certain domestic constituencies, they also introduce higher uncertainty for global trade flows, strain U.S. relationships with strategic partners, and risk fueling inflation through elevated input costs. As the August 1 deadline approaches, further market and diplomatic reactions are likely, and the long-term economic consequences remain deeply uncertain.

Source: CNN

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Daily News

[Quick Facts]

1. Brazil to respond to US based on law of reciprocity.

2. Trump issues tariff letters to 7 additional countries.

3. Fed meeting minutes: Some participants open to considering rate cut at next meeting.

4. Timiraos: Fed minutes reveal division into three camps.

5. Houthis claim sinking of Israel-bound vessel.

6. Holzmann: ECB needs no further rate cuts.

7. Nagel: ECB should neither plan nor rule out future cuts.

[News Details]

Brazil to respond to US based on law of reciprocity

Brazilian President Lula responded to Trump in a social media post. In light of the public statement made by US President Donald Trump on social media Wednesday afternoon (9th), "Brazil is a sovereign country with independent institutions that will not accept being taken for granted by anyone." Lula explained that in Brazil, freedom of speech should not be conflated with aggression or acts of violence. All domestic and international companies operating in Brazil must comply with Brazilian laws. Claims regarding a supposed US trade deficit with Brazil are incorrect. The US government's own statistics demonstrate that over the past 15 years, the US has maintained a $410 billion trade surplus with Brazil in goods and services. "Any measure to unilaterally raise tariffs will be responded to in accordance with Brazil's Economic Reciprocity Law."

Trump issues tariff letters to 7 additional countries

On July 9 local time, US President Trump published tariff letters addressed to leaders of seven countries on his social media platform Truth Social. The countries include the Philippines, Brunei, Moldova, Algeria, Iraq, Libya, and Sri Lanka. Among them, Libya, Iraq, Algeria, and Sri Lanka will face 30% tariffs. Brunei and Moldova will be subject to 25% tariffs, and the Philippines will have a 20% tariff rate. The new tariffs will take effect on August 1st. On July 7th local time, Trump had already sent the first batch of tariff letters to 14 countries including Japan and South Korea, with tariff rates ranging from 25% to 40%. He also indicated that more such letters would follow this week.

Fed meeting minutes: Some participants open to considering rate cut at next meeting

According to the latest minutes from the Fed's June meeting, participants noted that if tariffs lead to inflation exceeding expectations with greater persistence, or if medium- to long-term inflation expectations rise significantly, maintaining a tighter monetary policy stance would be appropriate, particularly amid stable labor market conditions and economic activity. However, should labor market conditions or economic activity weaken substantially, or if inflation continues to decline while expectations remain well-anchored, adopting a less restrictive monetary policy stance would be suitable. Participants observed that should persistently high inflation coincide with a deteriorating employment outlook, the Committee might face difficult trade-offs.

Timiraos: Fed minutes reveal division into three camps

Nick Timiraos noted on Wednesday (local time) that the Fed meeting minutes disclosed what was already known - officials were divided into three main camps regarding interest rate trajectories: 1. Cut rates this year but rule out July (mainstream camp); 2. Keep rates unchanged throughout 2024; 3. Advocate immediate action at the next meeting (Only "a couple" of members (likely 2 officials- Waller and Bowman) floated the idea of a cut as soon as the July meeting, contingent on the data evolving as expected).

The minutes also stated that "several officials said they thought the current overnight funds rate 'may not be far' from a neutral level, meaning only a few cuts may be ahead." In other words, unless the economy slows substantially, room for subsequent rate cuts would remain limited even if rate reductions resumed.

Houthis claim sinking of Israel-bound vessel

On the evening of July 9th, Yemeni Houthi military spokesperson Yahya Sarea announced that the Houthis launched an attack using a drone speedboat and six missiles against the vessel "ETERNITY C," which had violated their sailing route to Eilat, Israel. The assault successfully hit the target, causing the vessel to sink. The Houthis added that after the attack, they rescued some crew members and transported them to a safe location. This marks the second cargo ship sunk by the Houthis within a week for violating their maritime ban.

Holzmann: ECB needs no further rate cuts

ECB Governing Council member Robert Holzmann stated in a speech on Wednesday that there is no reason for further rate cuts, certainly not at the next meeting, nor for the remainder of this year. The Austrian central bank governor added that current borrowing costs, in his assessment, place Europe at least at neutral, but likely in expansionary territory.

Following eight rate cuts since June 2024, the ECB is widely expected to leave rates unchanged at this month’s meeting. This will mark Holzmann’s final meeting before his term ends in August.

Nagel: ECB should neither plan nor rule out future cuts

ECB Governing Council member Joachim Nagel said that the central bank should neither commit to nor rule out additional interest-rate reductions, arguing that policymakers must keep every option open as the inflation outlook remains uncertain.

"It can be said that we are able to respond to further developments." However, it would be unwise to commit to a certain interest rate path, contemplate further measures, or rule out taking further measures."

As one of the more hawkish members of the Governing Council, Nagel noted that "The intensification of uncertainty will not disappear quickly." Therefore, the ECB "is best advised to proceed cautiously and make decisions based on data at each meeting."

[Today's Focus]

UTC+8 15:00 ECB Executive Board member Cipollone delivers speech

UTC+8 16:00 ECB Governing Council member Villeroy speaks

UTC+8 21:00 St. Louis Fed President Musalem gives remarks

Risk Warnings and Disclaimers

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Diana Wallace

The Federal Reserve is no longer speaking with one voice, breaking the hearts of economic nerds everywhere. The minutes from the June 17–18 meeting show real cracks opening up inside the room, with policymakers clashing over how soon, and how deep, interest rate cuts should go.

Everyone agreed to hold rates steady at 4.25% to 4.5%, but what came next showed that consensus is slipping fast. According to the Federal Reserve minutes released Wednesday, officials disagreed over whether the next step should be aggressive rate cuts to fight slowing growth or a cautious hold due to inflation risks from Trump’s tariffs.

The majority backed at least one cut later this year, calling the inflation from tariffs “temporary and modest.” But a smaller group thought inflation was still too high to risk easing, especially with the economy showing strength in some areas.

Officials push conflicting rate timelines

A “couple” of Fed members said they were ready to cut rates as early as this month. Others argued there should be no cuts at all in 2025. The minutes didn’t attach names to these views, but Michelle Bowman and Christopher Waller have already gone public. Both said they’d support a cut at the next Fed meeting on July 29–30, if inflation doesn’t spike again.

Meanwhile, “several” officials warned the current rate might already be close to a neutral level. That means there might only be room for a few small cuts. They pointed to inflation still sitting above the 2% goal and said the economy is still showing signs of resilience.

The Fed’s internal projections expect two cuts this year, with three more across the next two years. But the dot plot, which shows individual policymakers’ views, is all over the place. Some want deeper cuts. Others think the Fed should stay on hold.

Trump isn’t waiting quietly on the sidelines. The President has been hitting Powell hard, both in speeches and online. He has insulted and berated him several times.

Powell, for his part, repeated his usual position. He claims the Fed will not respond to political pressure. He said the bank would stay cautious, as inflation remains uncertain and the economy still shows strength. That was backed up in the minutes:

“Participants agreed that although uncertainty about inflation and the economic outlook had decreased, it remained appropriate to take a careful approach in adjusting monetary policy.”

Trump tariffs, weak consumer spending add pressure

Trump’s new wave of tariffs is only adding to the chaos. He announced the first round on April 2, then followed up with 21 letters to world leaders, warning of new levies unless trade deals are reached. These sudden changes are making it harder for the Fed to see the full picture.

Despite the threats, inflation has stayed low so far. The Consumer Price Index rose just 0.1% in May. While inflation measures are still sitting slightly above the Fed’s 2% goal, the public isn’t panicking.

Meanwhile, Peter Navarro, Trump’s economic adviser, in an op-ed published on The Hill accused Powell of committing his “third major policy blunder in six years” by not lowering rates now. “If he continues this tight-money path through the July 29 Fed meeting,” Peter wrote, “Too Late Powell will go down as the worst Fed chair in history.”

Peter compared Powell to Arthur Burns, Nixon’s Fed chair in the 1970s, who kept rates too low to help Nixon’s re-election and caused long-term inflation and stagnation. Peter said Powell has no economics degree, a rarity for someone leading the world’s largest central bank, and lumped him in with G. William Miller, whose failed tenure ended in under two years.

He then laid out Powell’s earlier missteps. First, raising rates four times in 2018 despite low inflation and a booming Trump economy. That move cut GDP growth in half. Then, in 2021, Powell kept rates near zero even as inflation soared past 5%. He waited until March 2022 to finally act, leading to one of the most intense hiking cycles in Fed history: 11 rate hikes in 12 months.

Peter also accused Powell of staying silent while Democrats passed more than $2 trillion in spending bills, saying Powell failed to warn them it would drive up inflation. Now, Peter argues, Powell is on the verge of another mistake by refusing to acknowledge that Trump’s policies — tax cuts, tariffs, deregulation — are delivering strong growth without overheating the economy.

Source: CryptoSlate

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LinoCapital

The European Central Bank doesn’t need to continue easing policy as borrowing costs may already be providing stimulus to the economy, according to Governing Council member Robert Holzmann.

“There is no reason at the moment why a further cut should take place — definitely not at the next meeting, and also for the rest of the year,” the Austrian central-bank chief was cited as saying in an interview with Market News. He added that under his assessment, the current level of borrowing costs “puts us at least at neutral, but quite likely in expansionary territory.”

After eight cuts since June 2024, the ECB is widely expected to keep rates on hold when officials meet this month. That’ll be the last meeting for Holzmann, whose term ends in August.

Source: Bloomberg Europe

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Diana Wallace

Key Takeaways:

● FOMC considers rate adjustment amid economic uncertainties.

● Interest rates held steady at 4.25%-4.5%.

● Potential crypto market impact with rate adjustments.

The Federal Open Market Committee (FOMC) discussed potential monetary policy changes in its June 17–18 meeting, highlighting economic risks and inflation concerns.

FOMC June Meeting Review: Economic Risks and Policy Implications

Rate adjustments could influence global markets, especially cryptocurrency assets, increasing investor activity.

Market Implications

The FOMC meeting, led by Chair Jerome Powell and other officials, analyzed prevailing economic risks, emphasizing the potential need for a reduction in the target range. Economic uncertainties and inflation pressures were central to discussions, underscoring policy complexity.

Participants considered the possibility of economic activity weakening and assessed inflation pressures as possibly temporary. With current rates held steady since December 2024, the committee remains vigilant amid mixed signals. As Jerome Powell stated, "Most participants assessed that some reduction in the target range for the federal funds rate this year would likely be appropriate, noting that upward pressure on inflation from tariffs may be temporary or modest, that medium- and longer-term inflation expectations had remained well anchored, or that some weakening of economic activity and labor market conditions could occur."