Japanese Finance Minister Katsunobu Kato underscored that any dialogue with US Treasury Secretary Scott Bessent will build on their prior agreement that exchange rates should reflect market dynamics, with excessive volatility posing risks to economic and financial stability.
Speaking at a Tokyo press conference on May 20, 2025, Kato expressed optimism about exchanging views on currency policy and other bilateral issues during the G7 meeting.
Market data indicates heightened sensitivity to USD/JPY movements, with the pair down 0.31% today amid bearish pressure on the US dollar. Kato’s remarks suggest a focus on stabilizing markets without setting explicit currency targets, a stance reinforced after his November 2024 meeting with Bessent in Washington.
ALSO READ | US Dollar Weakness Sparks Forex Volatility: AUD/USD, NZD/USD, and USD/JPY in Focus.
US Trade Deficit and Yen Weakness in Focus
The talks come against the backdrop of President Donald Trump’s push to address the US trade deficit, which reached $80.2 billion in March 2025, according to recent economic data.
Trump’s past criticism of Japan for allegedly maintaining a weak yen to boost exports has fueled speculation that Tokyo may face pressure to strengthen its currency.
A stronger yen could enhance the competitiveness of US manufacturers but risks disrupting Japan’s export-driven economy.
Japan’s April 2025 retail sales rose 5.3% year-over-year, slightly above expectations, but industrial production growth slowed to 5.8%, signaling mixed economic signals.
Meanwhile, Moody’s downgrade of the US credit rating from Aaa to Aa1, citing a projected federal debt rise to 134% of GDP by 2035, adds complexity to the US dollar’s outlook, indirectly impacting USD/JPY dynamics.
Did You Know?
The Japanese yen is considered a safe-haven currency, often strengthening during times of global economic uncertainty due to Japan’s large foreign exchange reserves and stable financial system.
G7 Meeting to Navigate Broader Economic Tensions
The G7 finance leaders’ gathering in Canada this week provides a critical platform for Kato and Bessent to address currency policy amid broader economic challenges.
Separate US-Japan talks on tariffs have deliberately sidelined currency discussions, allowing finance chiefs to focus on exchange rate stability.
Sentiment suggests markets are closely monitoring US-China trade tensions, with Trump’s proposed tariffs and an expanded entity list targeting Chinese chipmakers adding to global risk aversion.
These factors contribute to the USD/JPY pair’s current consolidation within a descending broadening wedge on the 4-hour chart, with traders eyeing a potential breakout above 148.30 or further downside toward 145.50.
ALSO READ | Asian Currencies Tread Water as US Dollar Dips Post-Moody’s Downgrade
Japan’s Economic Scrutiny Intensifies
Kato also noted that Japan is closely assessing the economic fallout from Moody’s US credit downgrade, which could influence global capital flows and yen demand.
The stakes for maintaining currency stability are heightened by Japan's own fiscal challenges, which include a public debt-to-GDP ratio exceeding 250%.
With the Bank of Japan maintaining its ultra-loose monetary policy, the yen remains under pressure, trading at multi-month lows against the dollar.
Kato’s commitment to “constructive” dialogue with Bessent underscores Japan’s intent to balance domestic economic priorities with international expectations, particularly as markets anticipate heightened volatility in the coming sessions.
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