Japanese yen eases as Trump threatens 35% tariff

The Japanese yen weakened toward 144 per US dollar on Wednesday, retreating from over three-week highs as investors reacted to renewed trade pressure from Washington.

The move followed US President Donald Trump's threat to impose a 35% tariff on Japanese imports, part of an effort to pressure Tokyo into making concessions in ongoing trade negotiations. Trump described the talks as "really hard" and reiterated long-standing criticisms of Japan's limited market access for American automobiles and agricultural products, particularly rice.

The abrupt escalation in rhetoric jolted currency markets, raising concerns over a potential deterioration in US-Japan trade relations, which had recently shown signs of stabilizing. Such developments tend to weigh on the yen due to Japan’s export-heavy economy, which is highly sensitive to the threat of protectionist measures.

Despite the external pressure, domestic economic data released earlier in the week painted a more resilient picture. Notably, the Bank of Japan’s Tankan survey showed an unexpected uptick in business sentiment among large manufacturers during the second quarter. This improvement suggests that Japanese firms remain cautiously optimistic, supported by stable domestic demand, accommodative monetary policy, and some easing of input cost pressures.

Externally, the yen had initially found support from dovish expectations surrounding Federal Reserve policy, as well as mounting market concerns over the fiscal and inflationary implications of President Trump's newly passed tax-and-spending bill. The legislation, which is projected to add $3.3 trillion to the US national debt, has contributed to downward pressure on the US dollar, making the yen relatively more attractive in recent sessions.

However, the yen’s strength proved short-lived as risk aversion subsided and focus shifted back to trade risks and the yield differentials between the US and Japan. While the Bank of Japan continues to maintain ultra-loose monetary policy, the Fed is widely expected to pivot toward rate cuts later this year, a divergence that could eventually narrow the rate gap. In the short term, however, market volatility and geopolitical headlines remain key drivers for the yen.

Looking ahead, currency markets will be watching both US labor market data and the next round of Japan-US trade negotiations for clues on future direction. With trade policy once again in the spotlight and global monetary conditions in flux, the yen is likely to remain highly sensitive to shifts in sentiment and policy signals from major economies.