(Project of the Kajima Institute of International Peace)
Economic Influences of the Trump Administration
Senior Associate, Society of Security and Diplomatic Policy Studies
Professor, Gakushuin University
1. Changing Macroeconomic Environment
Since the day after Donald Trump won the US presidential election, the market has shown a trend to favor weak yen (strong dollar) and the rise in the stock price and interest rate was observed. The market fell in confusion on the very day the victory of Trump became certain, but soon after, the market conditions started to show the above-mentioned trend.
The main points of the economic policy of the Trump administration is clearly stated in "Scoring the Trump Economic Plan: Trade, Regulatory, & Energy Policy Impacts" by Peter Navarro and Wilbur Ross, which came out last September. The administration will implement deregulation in the areas of finance and energy to boost the export of shale gas and oil. A drastic reduction in corporate tax will be realized, while fiscal expenditures will be increased through inflationary measures and investments in national defense. The administration will proactively push forward export expansion in accordance with its trade policy, which I will touch on later.
In terms of its macroeconomic policy, the administration is likely to accelerate economic stimulus. The US economy has already achieved almost full employment. If the economy is overheated through-stimulus measures, interest rates, prices, and wages will rise remarkably.
As if sensing such an economic development, the US long-term interest rate has been rising after Trump's victory. The rise will contribute to weaker yen. Moreover, as stock prices rise in the US market, the Japanese stock market tends to rise likewise.
The present situation is too opaque to say anything about the future of US financial policy, but, as a whole, the Trump administration is changing the course to a monetary restraint and fiscal stimulus policy from the Obama administration's monetary easing and fiscal restraint policy.
The trend of weakening yen will give a major boost to the Japanese economy which is still groping to exit from deflation. Oil prices have now turned upward after hitting the bottom, and the view that Japanese prices and wages will rise more swiftly than expected earlier is gradually gaining more ground.
Given the Trump administration"s macroeconomic policy to further lift the US long-term interest rate, as long as the Bank of Japan (BOJ) attempts to maintain its long-term interest rate (the ten year national bond yield rate) at near zero, the interest rate spread between Japan and the United States will widen, and the pressure to depreciate the yen will mount. This will serve as a strong favorable wind for the Japanese economy struggling with deflation.
2. Does Trump's check against cheap yen work?
It is hard to imagine, however, that the Trump administration which shows readiness to check high dollar may readily approve excessive depreciation of the yen. Japan may be blamed for currency manipulation along with Germany and China, and the verbal intervention to realize strong yen against US dollar will be made.
However,it is the macroeconomic policy of the United States that is accountable for the current strong-dollar situation, not Japan, Germany or China. The greatest foe of President Trump who is trying to check strong dollar may be President Trump himself who is about to embark on a full-fledged economic stimulus package.
Japan is concernedapprehensive that Trump administration may put its nose into her macroeconomic policy, arguing that an easy-money policy of the BOJ is responsible for weak yen. The BOJ is implementing an easy-money policy in order to stop deflation; meanwhile it is difficult to negate that the policy has led to weak yen as a result. It is a cause for alarm if the United States starts intervening in Japan's monetary policy, using excessively weak yen as an excuse to do so.
While the US long-term interest rate is on the upward trend, if Japan tries to cling to the long-term interest rate target at zero, the yen may become much weaker to the dollar. Such an excessively weak yen is not preferable for Japan either. Therefore, if the US long-term interest rate rises, the BOJ can as well accept a rise in the long-term interest rate to a certain extent.
It may be a little hasty to predict, but it is necessary to assume the possibility of changes in the trend of low inflation, low interest rate and low growth that has continued so far. the BOJ is likely to change its stance andto accept the rise of its long-term interest rate if Trump's policy stimulates the US economy, and leads to a higher US long-term interest rate,. The BOJ should let the interest rate rise to maintain appropriate exchange rates rather than persist in zero interest rate, thereby causing an excessively weak yen.
What "an appropriate yen-dollar exchange rate" is a question hard for anyone to answer, but it is certainly not compatible with such a yen value exceeding 120 yen to a dollar. The current exchange rates ranging between 110 yen and 115 yen to a dollar may be a favorable level for Japan aiming at overcoming deflation. At all events the main premise for the BOJ to accept higher long-term interest rates is a steady continuing rise in price and wage. Signs are visible around us that prices and wages are starting to rise. If prices and interest rates continue rising gradually, it is desirable to connect this trend to an exit from excessive monetary easing. To this end, we should watch closely the development of the present macroeconomy.
3. Trade Friction under the Trump Administration
The present author wants to draw attention to the economic policy of the Trump administration in terms of its influence on macroeconomy as described above and trade policy. The aforementioned report by Navarro and Ross has given a very high score to Trump's trade policy. In other words, the trade policy is a key for the administration to realize the expansion of employment and a strong US economy.
President Trump has put to the fore a very strong protectionist policy since during the electoral campaign. The Navarro-Ross report includes statements to the following effects: China's entry into the WTO flooded America's markets with Chinese imports, thereby creating massive, chronic trade deficits; since there are many unfavorable points in NAFTA, a renegotiation is necessary; it was a mistake to have concluded the U.S.-Korea free trade agreement, etc. Given such statements understood at face value, it is apprehended that the United States may make a great shift to take up a protectionist policy.
Actually just after taking office, President Trump suspended visa issuance to people from some Middle Eastern countries, and brought about confusion in the movement of people across the borders. Furthermore, as part of corporation tax reform, President Trump gave orders to levy a border tax on import goods while reducing export taxes, and thus he is reportedly considering the introduction of a protectionist taxation system that may be against WTO rules.
It is difficult to judge at this moment how far such a movement may be materialized. Because a US trade policy is largely decided by the Congress, a further development will depend upon congressional decisions. Furthermore, it is not decided by the government's intention alone whether the United States moves in the direction of protectionism. Another stakeholder is private enterprises. Remember the Japan-U.S. trade friction from 1980s through 90s, where it was not exaggerated to say that US private enterprises proactively took initiative in the trade friction over automobiles and semiconductors.
Filing anti-dumping suits; criticizing Japanese industries by publishing reports to play up the so-called closed character of Japanese business practices, and taking into a political showdown whenever there is a chance --- these were notable features of the Japan-U.S. trade friction. We must keep watch over actions American automobile and steel industries will take. Such protectionist actions of US companies are in a sense induced by the US government's protectionist stance. In this sense, the US government's stance is primarily important in trade friction.
Japanese industries seems to have been alerted a great deal, as, among others, Toyota Motor Corporation was criticized by name in Trump's tweets. Our car manufacturers represent Japanese enterprises that depend highly on the US market. For years to come, the industrial policy of the Trump administration will be an instability factor for many Japanese companies that will continue business in the United States. It will constitute a serious problem for the affected companies.
From a macroeconomic point of view, however, it is uncertain whether protectionist policies are to influence investments and trade in a great measure. Many Japanese companies have had much difficulty in trade friction since 1980s, but Japanese trade and overseas investment do not seem to have been adversely affected thereby. Japanese car manufacturers have thus far continued to respond flexibly by the expansion of production in the United States, and have achieved business growth even during the years of trade friction. Expectations are high for the responsive capabilities of Japanese companies.
4. The US-Japan Bilateral Talks
Prime Minister Shinzo Abe's visit to the United States seems to have somewhat soothed Japanese people's anxiety about the economic policy of the Trump administration. From the summit talk between President Trump and PM Abe in Washington and Florida we can learn clearly about the Trump administration's attitude to evaluate relations with Japan. The US side seems not to have been critical about Japanese economic policy on exchange rates or trade policy.
It is worth noting that the a new US-Japan economic dialogue will be held under the leadership of Deputy Prime Minister Aso and Vice President Pence. Details of the meeting agenda are yet to be discussed, but as the meeting will be cross-sectoral in nature, it is unlikely to have trade issues in individual field discussed there. This is a preferable move.
The Trump administration made a showy start by withdrawing from TPP. It is a disappointing move for Japan, which has been conducting TPP negotiations for years and has pursued domestic coordination. As the possibility to revive TPP in some way or other in the future has not completely vanished yet, Japan should keep a never-say- die attitude. Reportedly PM Abe has explained the significance of TPP to President Trump at the recent summit talks.
The possibility cannot be denied that a bilateral agreement such as a Japan-US free trade agreement or a Japan-US economic partnership agreement would be placed on the agenda for Japan-US bilateral talks. In fact, President Trump seems to hold a strong wish to develop a bilateral negotiation with major countries. He clearly states his intention to start such a negotiation with the United Kingdom.
Witnessing substantial progress in multilateral TPP negotiations, many Japanese people may feel disgusted about the idea of discussing a bilateral agreement afresh. Indeed, a multilateral agreement has obvious advantages; however, until the United States announced its participation in TPP several years ago, no small number of people here had asserted that a Japan-US free trade agreement should be concluded.
Promoting a comprehensive economic dialogue with the United States, its most important economic partner, is certainly advantageous to Japan. Meanwhile, in the past trade friction negotiations, Japan used to be pressured into an involuntary settlement regarding automobiles and semiconductors; consequently, we should be careful in future negotiations. On the other, it is quite significant for both countries to discuss the rules in cross-sectoral manner.
Throughout TPP negotiations, discussion was made on investment rules and new institutional arrangements for service areas, besides border measures like tariff elimination. It is meaningful for both countries to reconfirm those rules in a similar way and formulate them into a bilateral agreement. Once such an agreement has actually been adopted, it will serve as a model agreement for other countries in the Asia-Pacific, and in result it may be possible to aim at realizing a cooperative regime conceived by TPP promoters.
In any case, Japan needs to actively advance bilateral talks with the United States. It is desirable to link the results of the recent summit talks in Washington to future development.
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Toru ITO Associate Professor, National Defense Academy of Japan
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Hideshi Tokuchi, Senior Fellow, National Graduate Institute for Policy Studies (GRIPS)
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Dr. Satoru Nagao, Hudson Institute
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