U.S. Treasury Secretary Scott Bessent and Japanese Finance Minister Katsunobu Kato are set to start a dialogue on currency rates when they meet this week in Washington.
Their meeting should capture in vivid fashion the lack of clarity in U.S. trade policy at a time when Japanese decision makers are looking to curtail the recent surge in the yen, which has appreciated by nearly 13% against the greenback since last July.
The yen is trading around 140 to the dollar, which threatens to limit the profit margins of Japanese firms.
Also at issue are capital flows between the countries as money flows out of the dollar into safe havens like the yen. But Washington, aiming to limit dollar diversification, paradoxically wants a stronger yen, which Bessent is expected to press for.
The Bank of Japan has moved at a glacial pace to lift its policy rate—which would attract further capital flows into Japan—and that slow action is likely to create further tensions between the nations.
Washington wants a weaker dollar against the yen that helps narrow the trade deficit and will almost surely push the Japanese financial authority to lift rates.
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Furthermore, if the Japanese were to conduct open market operations to strengthen the yen, it would need to sell Treasury holdings, which would send U.S. interest rates higher. Already this month, the Japanese sold off $20 billion in Treasury notes as the U.S. rolled out higher tariffs, the Financial Times reported.
That is a vivid illustration of the internal inconsistencies inside U.S. policy preferences which underscore the de-risking from American dollar-denominated assets over the past few weeks that has sent yields higher and the greenback lower.
The loose talk of a so-called Mar-a-Lago accord that would result in a coordinated devaluation of the dollar was always a form of political wish-casting. It will experience a well-deserved denouement this week as the inconsistent U.S. trade policies crash into the reality of global capital flows that determine foreign exchange valuation.
