BoJ to pause as a stronger Yen takes away some cost-inflation pressure but also that of the Trump administration

President Trump’s “Liberation Day” has additional complications to the Bank of Japan (BoJ)’s endeavor to normalize its monetary policy further. In addition to the 10% general tariff, the US government had imposed 24% reciprocal tariff on Japanese goods, which were temporarily lifted on April 9th and now under a 90-day negotiation. As Japan’s trade surplus with the US remains substantial (Chart 1), the scope of the negotiation is broad, ranging from agricultural products, national security and non-tariff barriers including what the Trump administration considers a very weak Yen.Given the pressure from the Trump administration, the Yen rapidly appreciated to around USDJPY=143 from 150 with sharply rising speculative long position (Chart 2). Furthermore, the falling FX carry trade index and rising VIX reveal declining attractiveness of carry trades (Chart 3), limiting downside risks on the Yen.The reversal of a very weak Yen not only helps Japan in its negotiations with the Trump administration, but it also helps control cost-inflation which had been aggravated by the very weak Yen. This is also a relief for the BoJ, which will not need to hike too rapidly (Chart 2).In the same vein, while the results on the spring wage negotiation and lower import inflation are expected to support private consumption, the economic outlook is deteriorating with increasing uncertainty coming from the global tariff war, threatening the manufacturing sector.All in all, the BoJ is expected to remain on hold at the May 1st meeting with a hawkish tone. Interestingly, the Trump administration and the BoJ have a common interest in avoiding a Yen depreciation at the current juncture. The Yen appreciation is happening without a BoJ hike, and the activity data is bound to worsen which makes a waiting strategy all the more compelling.  All in all, the BoJ is anticipated to keep the option to further normalize until the dust in the trade negotiations with the US settles.