Is the Japanese yen strengthening? Citigroup: Japan's $550 billion investment fund may trigger a "mini Mar-a-Lago agreement"
Japan's planned investment fund may heavily rely on its $1.3 trillion foreign exchange reserves. U.S. Treasury bonds are a key component of these reserves, with an estimated duration of 3-5 years. If Japan finances this long-term investment fund by selling short-term U.S. Treasury bonds, this capital movement could push up U.S. long-term bond yields, thereby weakening the dollar and strengthening the yen
Citigroup believes that the $550 billion investment fund involved in the US-Japan tariff agreement may give rise to some form of a bilateral "mini Mar-a-Lago agreement," promoting a weaker dollar and a stronger yen.
On September 12, Citigroup analyst Osamu Takashima released a research report stating that the source of the $550 billion Japan plans to invest in the US may heavily rely on Japan's $1.3 trillion foreign exchange reserves. The report noted:
We do not expect a significant shift in multilateral monetary policy similar to the 'Mar-a-Lago agreement,' but a bilateral 'mini Mar-a-Lago agreement' is indeed possible.
The US Treasury bonds held by Japan are a key component of its foreign exchange reserves, with an estimated duration of 3-5 years. However, the investment fund established under the tariff agreement is expected to invest in US assets with a duration of 10-20 years.
If Japan finances this long-term investment fund by selling short-term US Treasury bonds, such a fund movement could push up US long-term bond yields. To stabilize the market, the US may pressure Japan to extend the duration of its US Treasury holdings when managing its foreign exchange reserves.
This high-level bilateral coordination to address potential market volatility is the basis for what Citigroup refers to as the "mini Mar-a-Lago agreement." Citigroup analysts emphasize:
We believe that, from a monetary policy perspective, there will be a persistent tendency for a weaker dollar and a stronger yen.
This expectation stands in stark contrast to the recent weak performance of the yen. Due to political uncertainty and tariff issues casting a shadow over the Bank of Japan's interest rate hike path, the yen has performed the worst among major currencies in the past three months.
