"Plaza Accord 2.0" is difficult! Focusing on the US-Japan finance ministers' meeting, the yen exchange rate "the US wants 100, the realistic compromise point is 120"?

The market is closely watching the US-Japan finance ministers' talks, while Wall Street has begun to bet on a strong rebound of the yen.

Besenet has made it clear that he hopes to include exchange rate discussions in trade negotiations with Japan. Speculation about a possible "Plaza Accord 2.0" is circulating in the market.

In this regard, Citigroup analyst Osamu Takashima's team stated in a report released on the 22nd that it is difficult for both sides to reach a so-called "Plaza Accord 2.0," as there are differences between the US and Japan regarding the target exchange rate for the yen.

The US side may expect the yen to rise to 100 per US dollar, while a more realistic compromise point may be around 120 per US dollar. Given that Besenet is a finance minister with rich experience in financial markets, he may prioritize achieving the exchange rate target through the normalization of the Bank of Japan's monetary policy rather than direct currency intervention.

On Tuesday, driven by risk aversion, the yen broke through the psychological key level of 140 against the US dollar, rising to 139.90, the highest level since September last year, becoming the best-performing currency among G10 currencies. Meanwhile, the US dollar weakened "abnormally," with the dollar index currently falling to 98.17. Citigroup stated that the medium to long-term outlook remains clearly bearish on the dollar against the yen.

Citigroup: The US wants 100, the realistic compromise point is 120

Besenet is about to hold talks with Japanese Finance Minister Kato Katsunobu, marking the second round of US-Japan trade negotiations. Besenet has made it clear that he hopes to include exchange rate discussions in trade negotiations with Japan. This has sparked market speculation about a possible "Plaza Accord 2.0."

Citigroup believes that currently, the US side seems to expect the yen to appreciate to a level of 100 per US dollar, while Japanese authorities may be more willing to accept a gradual appreciation of the yen to 130 per US dollar. The possible compromise point between both sides is around 120 per US dollar.

This bilateral agreement could be referred to as "Plaza Accord 2.0," to distinguish it from the multilateral "Mar-a-Lago Accord."

"Given that the 'Mar-a-Lago Accord' is a method of handling currency negotiations involving a complex network of interests and multilateral processes, we believe the risk of such an agreement emerging at this stage is low."

It is worth noting that Besenet, as a finance minister with rich experience in financial markets, may prioritize achieving the exchange rate target through the normalization of the Bank of Japan's monetary policy rather than direct currency intervention, which differs from the approach taken during the Plaza Accord in 1985

Historical Experience of the Plaza Accord in 1985

The Plaza Accord of 1985 is a significant event in the history of foreign exchange. At that time, the United States, facing huge trade and fiscal deficits, sought to improve its trade situation through the depreciation of the dollar, thus planning and promoting the signing of the Plaza Accord.

When the agreement was signed, the initial goal of the U.S. authorities was to depreciate the dollar by 10%-12% in the short term. Specifically, for the exchange rate against the yen, this meant raising the yen from 240 to 1 dollar at that time to 200 to 1 dollar. However, the market's reaction far exceeded expectations, and this goal was achieved in just three months. By about six months after the signing of the agreement, the yen had further risen to 180 to 1 dollar.

In May 1986, then U.S. Treasury Secretary James Baker announced that there was no need to continue pushing for the depreciation of the dollar, as the yen exchange rate had reached 160 to 1 dollar. However, even without further official guidance, the downward trend of the dollar had not been reversed. It was not until the end of 1987, after the Louvre Accord in February 1987 and the Christmas Accord in December 1987, that the dollar-yen exchange rate bottomed out, ultimately falling to a level of 120 to 1 dollar.

If we make a simple analogy of the dollar-yen trend from 1985 to 1987, using the current level of 140 to 1 dollar as a reference, the initial target exchange rate can be seen as 120 to 1 dollar, while the point at which the U.S. stopped guiding the dollar's decline was around 100 to 1 dollar. As for the point at which U.S. authorities began to feel concerned, it might be near 75 to 1 dollar.

U.S.-Japan Exchange Rate Negotiations: Position and Goal Games

Citi stated that although the exchange rate issue is an important topic in U.S.-Japan trade negotiations, the upcoming talks between finance ministers this week may not have a significant market impact, mainly due to:

1. The two sides are still far from reaching a consensus on many aspects of the trade negotiations.
2. The tariffs imposed by the U.S. in April have already caused market volatility, and authorities may be cautious to avoid further market disruption.
3. The more macro "Mar-a-Lago Agreement" requires participation from multiple countries, and the likelihood of achieving this currently is low.

Citi believes that if Japan commits to expanding imports from the U.S., opening its market, and strengthening its defense capabilities, the Trump administration may ultimately abandon tariffs on Japan, especially if the expected normalization of the Bank of Japan's monetary policy can somewhat boost the yen.

The dollar-yen exchange rate may continue to form a downward triangle pattern, with a lower limit around 140 to 1 dollar. In the coming weeks, this currency pair may rise to around 145 to 1 dollar, which would not be surprising. However, analysts emphasize that the medium to long-term outlook remains clearly bearish on the dollar-yen. Risk Warning and Disclaimer

The market carries risks, and investment should be approached with caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investment based on this is at one's own risk