currency and trade wars, US and Japan - Nomura

Analysts at Nomura explained that Japan may have to allow the U.S. to talk down the dollar to avoid a worst-case scenario.

Key Quotes:

"Still, the fact remains that Japan runs the second-largest trade surplus with the US after China. If this imbalance persists despite largely open Japanese markets, the Trump administration may start focusing on exchange rate adjustments. 

Moreover, if the Trump administration pushes ahead with infrastructure-centric fiscal stimulus and the Fed continues its efforts to normalize monetary policy, the dollar will rise against other currencies, all else being the same. However, a strong dollar would have severe negative implications for the US manufacturers and workers that President Trump is so concerned about. 

That leaves three possible options for the Trump administration: (1) adopt an even more protectionist policy course, (2) talk down the dollar, or (3) engage in direct intervention on the currency market by selling the dollar. 

None of these options would be desirable for Japan or the global economy, but I think the first, which entails an all-out trade war, would be the most damaging, followed by the third, which could create a great deal of turmoil in the markets. 

That leaves the second option—President Trump talking down the dollar—as the course of action likely to lead to the least damage for Japan and the global economy.

If President Trump does embark on this kind of exchange rate policy at some point, or if he begins talking down the dollar against the yen, I think it would be best if Japan kept its monetary or forex policy response muted as long as the yen appreciation is within tolerable limits. Otherwise, President Trump might be forced further down the dangerous path of protectionism and currency intervention."