Credit Agricole: Assessing JPY’s immunity to Trump’s tariffs

The JPY has outperformed most G10 currencies amid tariff-driven FX volatility, benefiting from safe-haven demand. Historically, JPY weakness under Trump was more tied to Fed rate hikes than tariffs. However, JPY’s immunity to Trump tariffs may not be absolute.

Key Points:

1. JPY Remains Resilient to Trump’s Tariffs, But Risks Exist:

   • Past JPY weakness (Trump’s first term) was Fed-driven, not tariff-driven.
   • Japan’s trade surplus with the US is smaller than Canada & Switzerland’s, but still exists.
   • A direct tariff threat on Japanese exports would challenge JPY’s immunity.

2. Japan’s Diplomatic Efforts to Preempt Tariff Risks:

   • Japan is actively engaging with the Trump administration to avoid trade tensions.
   • Masayoshi Son (SoftBank) investing in Trump’s AI initiative (Star Gate AI) signals strategic alignment.
   • Japan is the second-largest foreign direct investor (FDI) in the US, behind Canada.
   • PM Shigeru Ishiba set to meet Trump on February 7, but his political fragility raises uncertainty about Japan’s negotiating power.

3. Fed Policy, Not Tariffs, Likely to Drive USD/JPY in 2025:

   • Unlike Trump’s first term, the Fed is now cutting rates, which supports JPY strength.
   • Credit Agricole sees 50bps of Fed cuts in 2025, slightly more than the 40bps currently priced in.
   • Upcoming US labor market and ISM data could be key for JPY’s trajectory.

Conclusion:

For now, JPY remains relatively immune to Trump’s tariffs, but this could change if Japan becomes a direct target. More crucially, Fed rate cuts—not trade policy—will be the primary driver for USD/JPY this year. Safe-haven demand keeps JPY resilient, but US economic data remains key for further moves.

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This article was written by Adam Button at www.forexlive.com.