Could a New Currency Pact Emerge Between the US and Japan Amid Trade Talks?
US-Japan Trade Talks: Currency Discussions Spark Speculation of a New Plaza Accord
Efforts by Washington to bring currency matters into the spotlight during ongoing US-Japan trade negotiations could mark a critical turning point in bilateral relations, according to strategists at Citi.
Japanese Finance Minister Katsunobu Kato is set to meet US Treasury Secretary Scott Bessent in Washington this week for the second round of trade talks.
While monetary policy was notably absent from the agenda during last week’s discussions led by Japan’s Economic Revitalization Minister Ryosei Akazawa, Citi highlights a key development: “Secretary Bessent has clearly expressed a desire to include currency exchange rates in the trade discussions with Japan.”
This move has fueled speculation about a potential “Plaza Accord 2.0,” referencing the historic 1985 agreement that led to a sharp appreciation of the yen.
Although Citi considers the chances of a broader multilateral deal—akin to a “Mar-a-Lago Accord”—to be slim at this stage, it sees a bilateral agreement between the US and Japan as a distinct possibility.
Strategists suggest that Washington may be eyeing a ¥100/USD exchange rate, while Japan could tolerate a gradual strengthening of the yen to around ¥130/USD. A compromise could potentially be reached near ¥120/USD.
The original Plaza Accord in the mid-1980s triggered a significant depreciation of the US dollar. Citing Yoichi Takita’s accounts of the negotiations, Citi notes that officials at the time aimed for a 10–12% drop in the dollar’s value, initially targeting ¥200/USD. The yen reached this level within three months, eventually strengthening to ¥120/USD by late 1987—far surpassing early expectations.
A similar trajectory today would imply a move from the current ¥140/USD to ¥120/USD. Citi notes, however, that a shift towards ¥100 could raise concerns, especially if the dollar falls below ¥75. Nonetheless, strategists caution against assuming history will repeat itself, as the financial and economic contexts are vastly different today.
Unlike the more legalistic approach under former Treasury Secretary James Baker during the original Plaza Accord, Secretary Bessent’s market background may influence a different strategy. Citi anticipates that Bessent might focus more on encouraging the Bank of Japan toward monetary policy normalization rather than pushing for direct intervention in currency markets.
In this scenario, yen appreciation would be driven more by internal policy changes rather than coordinated foreign exchange actions.
Despite these discussions, a near-term agreement appears unlikely. Citi believes that while the Trump administration might delay tariffs if Japan offers broader concessions, this week’s meetings are unlikely to produce any concrete outcomes specifically related to currency exchange rates.
As Citi notes, “We do not expect any FX-related announcements from this week’s finance ministerial meetings that would significantly move the markets.”
Following recent volatility linked to trade tensions, the dollar has weakened more against the yen than expected, approaching a technical floor around ¥140/USD. Although a short-term rebound toward ¥145/USD is possible, Citi maintains a bearish medium- to long-term outlook for USDJPY.
