The US and Japan are about to discuss exchange rates, and Japan may be forced to choose one of two options: high tariffs or a strong yen?

Trump may pressure Japan to either accept high tariffs or cooperate to promote the appreciation of the yen.

On Thursday, April 24, Japanese Finance Minister Katsunobu Kato will negotiate with the U.S. Treasury Secretary on foreign exchange issues in Washington. According to Xinhua News Agency, Japan's Minister of Economic Revitalization, Ryota Akizawa, held the first round of talks with the U.S. side last week. Subsequently, according to Global Times , Japanese Prime Minister Shigeru Ishiba stated last week that in the tariff negotiations with the U.S. government, Japan "does not intend to make significant concessions and will not rush to reach an agreement."

According to a research report by Nomura Securities on April 23, the U.S. may pressure Japan in the foreign exchange negotiations, requesting Japan to cooperate with the U.S. by allowing the dollar to depreciate and the yen to appreciate to reduce the U.S. trade deficit, and in return, lower tariffs.

Trump's core goal is to reduce the trade deficit, and both tariffs and a weak dollar policy can achieve this objective. Previously, the tariff policy triggered a market crash and public criticism, leading Trump to compromise and become more cautious. In contrast, a weak dollar policy will not immediately trigger price increases or economic slowdown, so Trump may choose this strategy to pressure Japan into cooperation to promote the depreciation of the dollar.

However, the Japanese government faces significant economic risks from the rapid appreciation of the yen and may find it difficult to accept Trump's demands. Nomura Securities predicts that the appreciation of the yen could lead to a decline in Japan's GDP by 0.67% to 1.41% within two years.

Trump's Compromise on Tariffs: Leveraging the Weak Dollar Advantage

Nomura points out that the specific relationship between tariffs and foreign exchange negotiations is still unclear, but the U.S. side has requested foreign exchange negotiations. Therefore, Kato must be prepared for a scenario where the U.S. government may link foreign exchange issues with tariff issues, pressuring Japan to make concessions. After all, this is not the first time the U.S. has pressured for yen appreciation, forcing Japan to open its market and increase U.S. imports.

This brings us to the main objectives of the Trump administration. Nomura notes that one of Trump's main goals in his second term is to reduce the U.S. trade deficit, and he typically has two means to achieve this—tariffs and a weakened dollar.

Specifically, tariffs raise the prices of imported goods and weaken the competitiveness of foreign products in the U.S. market, thereby reducing imports. A depreciated dollar can also reduce the U.S. trade deficit because a weaker dollar will enhance the competitiveness of U.S. goods in the international market, promote U.S. export growth, and simultaneously reduce imports.

Most importantly, the weak dollar policy has clear advantages over tariffs. For example, tariffs bring visible problems, such as rising domestic prices in the U.S., economic slowdown, and public criticism. These issues typically do not arise in the early stages of implementing a weak dollar policy because most U.S. import and export contracts are settled in dollars, and the initial depreciation of the dollar will not cause domestic prices of imported goods to rise immediately like tariffs do. At the same time, U.S. goods will become cheaper in the international market, increasing U.S. exports and helping to reduce the trade deficit However, it is important to note that the depreciation of the dollar also carries risks. If the market perceives the dollar as less valuable, the attractiveness of the financial market diminishes, leading to capital flowing out of the United States to other countries. After the Plaza Accord in 1985, the rapid depreciation of the dollar triggered the stock market crash in 1987.

Trump previously faced these issues when announcing reciprocal tariffs, including criticism from Wall Street and accusations from the public, which also led to a sharp decline in the financial markets. The market was concerned that tariffs would drive up prices and trigger an economic slowdown. Trump's subsequent compromises also indicate that this incident clearly impacted the Trump administration, making it more cautious regarding tariff policies.

Therefore, considering the advantages of a weak dollar, it is less likely to provoke public criticism and rapid price increases like tariffs do, and the Trump administration is likely to decide to adopt a weak dollar strategy as the next course of action. Thus, Trump aims to achieve a "Mar-a-Lago Agreement" similar to the Plaza Accord to suppress the dollar. In the 1985 Plaza Accord, the countries and the United States reached a consensus to cooperate in addressing the issue of excessive appreciation of the dollar.

Trump's "Small Calculation"

After the Plaza Accord was reached, major world economies were concerned that the depreciation of the dollar would lead to global economic and financial turmoil. Therefore, countries coordinated and cooperated to orderly control the depreciation of the dollar to avoid such shocks. However, today, the world economies are no longer as worried about a dollar collapse, so it is unlikely that they will cooperate with the Trump administration to weaken the dollar through joint intervention in the foreign exchange market.

The Trump administration may pressure Japan as a step to promote the "Mar-a-Lago Agreement," hoping that America's trading partners will cooperate in depreciating the dollar. Japan is considered an easy country to pressure, and Trump may ask Japan to cooperate in weakening the dollar in exchange for lowering Japan's tariff rates.

If Japan agrees to sell dollars and buy yen during coordinated intervention, leading to a rapid appreciation of the yen, then the U.S. dollar depreciation policy may be very effective.

Japan's "Dilemma"

After the Plaza Accord was signed, the dollar depreciated, and the yen appreciated. Initially, the appreciation of the yen was beneficial for the Japanese economy, as it made imported goods cheaper, helped stabilize prices, and promoted the recovery of personal consumption. However, if the yen appreciates too quickly, it can cause significant harm to the Japanese economy.

Nomura estimates that a rapid appreciation of the yen could lead to a decline in Japan's GDP by between 0.67% and 1.41% over two years.

Nomura believes that if the Trump administration wants Japan's help in depreciating the dollar and appreciating the yen as a condition for lowering tariffs, the Japanese government is well aware that a rapid appreciation of the yen would severely harm the Japanese economy, making it difficult to agree to Trump's requests.

The Momentum of Dollar Depreciation is Hard to Curb

Nomura points out that when analyzing the impact of dollar depreciation on the U.S. economy and trade, one can typically look at the real effective exchange rate (REER), which reflects the price competitiveness of U.S. products in the international market. Simply put, the higher this index, the stronger the dollar, making U.S. products more expensive in the international market and weakening their competitiveness As of March 2025, the latest data shows that the real effective exchange rate (REER) of the US dollar is 109.5, which is relatively high historically, only 5.9 percentage points lower than the 116.4 recorded before the Plaza Accord in March 1985. This indicates a relatively strong dollar, meaning that American products are not priced low in the international market and lack sufficient competitiveness.

After the Plaza Accord was signed that year, the dollar began to depreciate rapidly. To stabilize the dollar, countries signed the Louvre Accord in February 1987, hoping to jointly intervene in the exchange rate market to prevent the dollar from depreciating too quickly. However, these efforts were in vain, and the real effective exchange rate (REER) of the dollar continued to decline, reaching 78.5 by December 1988.

Nomura states that historical experience shows that once a trend of dollar depreciation is established and begins to gain momentum, it is difficult to curb the downward trend of the dollar even with cooperation from other countries. Therefore, measures to manipulate the exchange rate carry significant risks