Trump's targeting of Toyota could set off trade frictions: analysts

Tokyo

THE clash between US President-elect Donald Trump and Japan's Toyota Motor Corporation over the import of Mexico-manufactured cars into the US could herald wider trade frictions between Washington and Tokyo at a time when trade tensions between the US and China may also be rising, sources told The Business Times.

Meanwhile, friction between the incoming administration of Mr Trump and Japan could trigger a significant rise in the value of the yen this year, resulting in economic damage to Japan, according to analysts.

Tohru Sasaki, head of Japan markets research at JPMorgan Chase Bank in Tokyo, told BT that he expected US-China trade frictions to be a prime focus in 2017, but if the Trump- Toyota incident signals friction with Japan too then the yen could "strengthen more than expected".

Against this background, efforts to liberalise trade within Asia could intensify, and Japan could push ahead with some form of Trans-Pacific Partnership (TPP) agreement even without US participation, former senior Bank of Japan (BOJ) official Rei Masunaga told BT.

"Japan will not abandon the TPP easily, even without participation of the United States," Mr Masunaga added. Japanese Prime Minister Shinzo Abe and Australian Prime Minister Malcolm Turnbull meeting in Sydney at the weekend reaffirmed a commitment to free trade, including bringing into force the TPP.

"Trade policy will be the most difficult area of negotiation with the Trump administration," said Mr Masunaga, a former deputy head of the Japan Centre for International Finance. The US trade imbalance with Japan is smaller than that with China but it could become an issue, he suggested.

"Given the likelihood of the US becoming more protectionist under a Trump administration, which could lead to dollar depreciation, we expect the dollar to decline to around 100 yen" in 2017, said JPMorgan's Mr Sasaki, a former senior foreign exchange official at the BOJ.

Mr Trump's election in November created a kind of exuberance in stock markets on expectations that his pro-America policies would boost US and global growth while the prospect of higher US interest rates sent the dollar soaring against the yen and other currencies.

But since the incoming president specifically targeted Toyota in an attack on the company's plans to build Corolla cars in Mexico and ship them to the US, the yen has climbed back from its recent 17-month low of near 120 to the dollar and traded at around 114.5 last Friday.

This is decidedly bad news for Japan, analysts say. "If markets become less stable as a result of top US officials' remarks favouring a strong yen, the (dollar/yen rate) is likely to decline sharply even as Japan-US rate differentials widen," said Mr Sasaki.

Japan's economy had appeared set for a relatively good year with widening interest rate differentials and the initial confidence-boosting impact of Mr Trump's victory appearing to set the stage for a weaker yen and rising corporate profitability, leading to increased growth.

But the likelihood of renewed trade frictions with the US have dimmed the prospects, analysts say. "President-elect Trump's criticisms of Toyota Motor are unlike the Japan-US trade frictions of the early 1990s, as the current criticisms are directed at a particular company," said Mr Sasaki.

"The cases of the US trade conflict in early 1990s with Japan and early 2000s with the European Union suggest that the dollar exhibits a risk premium versus reserve currencies such as the yen and the euro," he noted. In other words, such conflicts push the dollar down and other currencies up.

"US protectionism led to a decline in Japan's trade surplus, but the dollar-yen rate declined substantially first. Confrontation tends to hurt the dollar more through concerns about investability than it helps through a potential change in the trade balance.

"After the Clinton administration took office in January 1993, top officials said that the yen should be even stronger, and that a strong yen is effective for correcting trade imbalances. As a result, the dollar-yen rate declined from 125 to around 100 in the first seven months."

"The structure of Japan-US trade is different today," Mr Sasaki added. "But there are similarities between Bill Clinton before he became president and President-elect Trump. Remarks on exchange rates by top officials in the incoming Trump administration warrant caution," he added.

Mr Trump's confrontational approach to trade issues could spur renewed efforts at regional trade liberalisation. "Japan is trying hard to lead by continuing to push for trade liberalisation," said Jesper Koll, veteran Japan analyst and head of investment firm Wisdom Tree.

Mr Abe "did pass through Parliament the TPP Bill", he said. "Does the 'new America' want to continue to be the lead-writer of global trade rules? Or does it withdraw into itself? If so, China will rise to the occasion and begin to actually write global rules."