As they watched the evening news last Saturday, Tokyo’s currency traders — along with everyone else in Japan — were given the chance to see Prime Minister Shinzo Abe out on the links, assiduously practising his golf swing before the biggest game of his life.
However this weekend’s summit at Mar-a-Lago in Florida between Mr Abe and President Donald Trump goes on the fairways, say analysts, the next few days will be pivotal for currency markets. Mr Abe arrives in Washington on Friday with the dollar-yen exchange rate and the future of Japan’s most important bilateral relationship firmly in the spotlight.
Tension and uncertainty ahead of the meeting saw the yen briefly appreciate into ¥111 territory this week. Its weakening back to ¥112 on Thursday, say dealers, provides an entirely false sense of calm. The yen has appreciated about 4 per cent against the dollar this year.
The headache for the foreign-exchange market is that the symbolism of a friendly game of golf may not be enough to disguise the political and economic consequences of the currency question to both sides.
Uncertainty has intensified in recent weeks as Mr Trump has demonstrated an ability to take US allies by surprise. For Australian prime minister Malcolm Turnbull, it was a presidential phone call abruptly cut short. For Japan, it was Mr Trump’s jarring assertion at the end of last month that authorities in Tokyo “play the money market, they play the devaluation market and we sit there like a bunch of dummies”.
Once Tokyo trading rooms had worked out the correct translation of “dummies”, they spotted where the risk lies: Mr Trump could be gearing up to label Japan as a currency manipulator.
Even if he does not, he may demand that any grand US-Japan deal includes a clause that would prevent Japan from currency intervention and constrain the Bank of Japan’s ability to carry out operations to control Japanese Government Bond (JGB) yields.
Adding to the piquancy of the summit are data this week revealing that Japan has overtaken Germany as the second-largest contributor behind China to the US trade deficit, with a share of 9.4 per cent. Japan is also the largest foreign holder of US Treasury debt, at $1.1tn, followed by China’s hoard of $1.05tn.
Marc Chandler, a foreign exchange strategist at Brown Brothers Harriman, says Japanese companies are “vulnerable to the new America First thrust”.
Some analysts argue that the currency issue is potentially so toxic that it will, on this occasion, be discussed only very superficially by Mr Trump and Mr Abe — certainly not in terms that would prevent the two leaders smiling on the putting green of the 18th hole.
In the short term, even the body language of the two leaders may matter. “What will be intriguing is any belief that there is a strengthening of relations,” says Derek Halpenny, forex strategist at MUFG.
“If there is genuine evidence of a stronger relationship and the US wants to retain a relationship with Japan, it would be reassuring to markets that they get along well. You would imagine it would help to encourage some renewed yen selling.”
But others, including Citibank forex strategist Osamu Takashima, suspect there is a good chance the issue will be discussed in some depth and potentially end with Mr Abe making a key concession to bolster his image as
Concessions are already in the air. Mr Abe is said to be coming to Washington with a promised package, including investing in high-speed rail projects in California and Texas.
The gathering risk for the yen, says Mr Takashima, is that the Japanese government loses the right to intervene if Mr Trump demands a no-manipulation clause.
Bank of America Merrill Lynch forex strategist Shusuke Yamada acknowledges the risk that the weekend’s golf could be overshadowed by a “lose-lose” situation for Mr Abe if Mr Trump does decide to make an example of Japan on currency.
All of the risks, according to Mr Yamada, are concentrated on a scenario in which the US insists that the BoJ and the dollar-yen rate are the subject of restriction.
“If Abe concedes, that will anger his conservative supporters who will see it as giving up sovereignty just for the sake of pleasing the US,” says Mr Yamada.
“It could destabilise his support base and cause significant yen strength, equity weakness and fiscal tightening to compensate. It will also anger people who support Mr Abe for his Abenomics programme and like the idea that Japan has a strong leader.”
But if restrictions on the currency are on the table and Mr Abe feels he has to push back, the US-Japan bilateral alliance could suffer a succession of blows from protectionist measures and even a threat to remove US military from its Japanese bases.
That would raise geopolitical risks in the region, says Mr Yamada, and in turn could see the yen rising sharply as it reprises its role as a safe-haven currency.
Knowing that both a high-profile concession by Abe and a confrontation with him would produce lose-lose outcomes, argues Mr Yamada, the strongest likelihood is that Mr Trump and Mr Abe do not, on this occasion, enter into a deep discussion on currency.
Whatever the outcome, Mr Trump will still call the shots. In golfing parlance, Mr Abe is coming to the end of his first round several shots off the pace and needing to get his swing back into shape.