Japan is walking on eggshells as trade surplus with the US continues to grow
Japan's June trade balance data earlier had a very subtle highlight and that was the fact that exports to the US fell by 0.9% y/y, but imports fell even more by 2.1% y/y. That means that Japan's trade surplus to the US is continuing to grow - something which will draw the ire of Trump surely.
After recording a $5.5 billion surplus in May, the year-to-date surplus stands at $29.3 billion and the run-rate for the year is set to be at $70.4 billion - eclipsing the $68.9 billion surplus seen in 2017.
But what's even more damning is the fact that since June, the Japanese yen has been the weakest performing major currency while the US dollar is the strongest. The yen has fallen by close to 3.5% against the dollar during this period.
Put two and two together, it's a recipe for inviting Trump to make Japan its next target as it is a similar scenario to what we've seen with China.
This creates an outside risk for yen pairs because if the US does walk down this path and start pointing fingers on Japan's trade and currency, expect the yen to gain. It's a bit convoluted but it's very much a similar scenario as to why the yen rallied even when North Korea is shooting missiles at Japan earlier in the year. The yen is still the favoured currency in times of distress - and that includes worries faced by the country itself.
While there will still be a long way before this plays out, and there will be some hints along the way surely, the greater Japan's trade surplus with the US grows, the closer we are to reaching a tipping point I reckon.
