Mid-June is a key point! If the US-Japan negotiations do not break through by then, there will be a risk of the yen weakening

The lack of progress in US-Japan trade negotiations has become a major risk facing the yen, which may lead to downward pressure on the yen this summer.

According to information from the Chasing Wind Trading Desk, Bank of America analysts stated in a report on May 16 that as Japan enters election mode after the G7 summit (June 15-17), if substantial progress is not made in US-Japan trade negotiations by mid-June, it will exacerbate Japan's fiscal and political risks, further weakening the yen.

Previously, according to Ministry of Commerce information, substantial progress was made in high-level economic and trade talks between China and the US, significantly reducing bilateral tariff levels. The US canceled a total of 91% of the additional tariffs, while China correspondingly canceled 91% of the counter-tariffs; the US suspended the implementation of a 24% "reciprocal tariff," and China also suspended the implementation of a 24% counter-tariff.

Bank of America analysts stated that despite the easing of China-US trade tensions, there has been no progress in US-Japan trade negotiations. The continued lack of progress has led to increasing market concerns about the Japanese government's fiscal situation, further weakening the yen and Japanese government bonds.

As the July Senate elections approach, Japanese political parties have begun proposing stimulus measures to address inflation and US tariffs, including a temporary reduction in consumption tax. If US-Japan trade negotiations do not progress, it will fail to boost government approval ratings, exacerbating political and policy uncertainty.

The Bank of Japan has clearly shifted to a dovish stance in its recent monetary policy meeting, dampening market expectations for interest rate hikes, while the Federal Reserve has remained unchanged, weakening expectations for rate cuts. This policy divergence puts pressure on the yen. Additionally, structural factors will continue to drive further selling of the yen, as confirmed by the latest balance of payments data. If there is no progress in US-Japan trade negotiations by mid-June, it will trigger further weakness in the yen and Japanese government bonds.

Structural capital flows are unfavorable for yen performance

According to the latest capital flow data, Japanese trust accounts purchased a record amount of foreign stocks in April and may have sold Japanese government bonds, exacerbating the steepening of the yield curve.

Even after the market turmoil in April, Japanese retail investors continued to buy foreign stocks, confirming the structural characteristics of this capital outflow. This ongoing willingness for external investment and the trend of Japanese companies continuing to invest overseas will exert long-term pressure on the yen.

Although the dollar has rebounded from its mid-April lows, its recovery is not as strong as that of US stocks, reflecting concerns about declining market confidence in the dollar.

The cross-yen exchange rate has risen, leading to a simultaneous weakening of both the dollar and the yen. As the market gradually views the euro as a major alternative to the dollar, if trade negotiations between the EU and the US progress faster than those with Japan, the euro against the yen may rise further. If the euro/yen breaks above 166 in October 2024, the dollar/yen may also approach 150.

Overall, the yen faces multiple risk factors, and mid-June is a key time point to observe the yen's performance. If by then there is still no breakthrough in US-Japan trade negotiations, the yen will face significant downside risks