Is Japan the Next Target in US Currency Diplomacy?

With news emerging that the United States is urging South Korea to strengthen the won, currency watchers and geopolitics analysts alike are asking a critical follow-up question:

Is Japan next?

While much attention is placed on South Korea’s ongoing negotiations, Japan’s prolonged yen depreciation, ultra-loose monetary stance, and export-heavy economy make it a prime candidate for US diplomatic and economic pressure. But Tokyo isn’t Seoul, and the implications for global markets and geopolitical stability could be even more profound.

Section 1: Understanding the Yen’s Persistent Weakness

The Japanese yen has depreciated by over 40% since its pre-COVID highs, hovering around multi-decade lows against the US dollar. This has not been a coincidence—it’s the result of a deliberate monetary policy framework:

Key Drivers of Yen Weakness:

Yield Curve Control (YCC) by the Bank of Japan (BoJ): The BoJ kept long-term interest rates near zero while other central banks hiked aggressively post-2021.
Massive Quantitative Easing: Japan is still buying government bonds and maintaining a large central bank balance sheet.
Low Domestic Inflation (until recently): Japan didn’t face the same inflationary surge as the US or Europe, allowing for continued dovish policy.

However, the weak yen has exported inflation back to Japan via energy and food prices. While BoJ Governor Kazuo Ueda is slowly adjusting policy, the overall stance remains extremely accommodative.

Section 2: Why the US Might Pressure Japan

1. Trade Imbalances

The US trade deficit with Japan has historically been a point of tension. A weaker yen makes Japanese goods cheaper in the US, which contradicts the “America First” manufacturing agenda pursued by both Republican and Democratic administrations.

2. Competitive Devaluation Risk

If Korea strengthens its won under US pressure while Japan does nothing, it could create a regional currency imbalance, leading to:

Capital flight from Korean and Taiwanese exporters
Artificial competitiveness for Japanese firms
Destabilization of Asia’s tightly woven supply chains

3. Strategic Realignment

In the era of US-China rivalry, Japan plays a crucial strategic role. A stronger yen could:

Enhance purchasing power for defense imports and joint initiatives
Signal Japan’s commitment to economic alignment with US objectives
Reduce global inflationary spillovers, aiding overall stability

Section 3: Japan’s Potential Resistance

Cultural and Political Independence

Unlike South Korea, Japan is less likely to yield quickly to external pressure. The political establishment has deep institutional memory of the Plaza Accord (1985)—a US-led agreement that forced Japan to appreciate the yen, which contributed to its asset bubble and the “Lost Decade.”

Economic Risk

Japan’s economy is still fragile:

Wage growth is slow
Private consumption remains weak
Corporate profitability heavily depends on export margins

Any abrupt yen appreciation could shock the equity market and undermine fragile economic gains, particularly for exporters like Toyota, Sony, and Canon.

Section 4: Historical Parallels – The Ghost of Plaza Accord

The Plaza Accord is the ultimate cautionary tale for Japan. In 1985, the G5 countries agreed to depreciate the dollar and strengthen the yen and Deutsche mark. The yen surged, Japan’s export growth slowed, and the economy eventually overheated and collapsed.

Why this matters now:

Japan remains traumatized by the aftereffects.
US pressure in 2025 might resemble Plaza 2.0—but without multilateral consensus.
Japan may see such moves as economic coercion.

Section 5: Policy Levers the US Might Use

Even if Japan resists, the US has tools to encourage compliance or apply pressure:

Currency manipulation designations: Though symbolic, they carry reputational and political weight.
Bilateral trade negotiations: Linking FX policy to other economic priorities.
G7/G20 pressure: Seeking multilateral support for coordinated FX stabilization.
Direct FX intervention (less likely): In extreme cases, the US Treasury could act on its own—though this is rare and reserved for crisis-level distortions.

Section 6: Market Implications If Yen Strengthens

A stronger yen would ripple across asset classes:

Japanese equities: Exporter-heavy indexes like the Nikkei 225 would likely fall.
Global supply chains: Cost of Japanese components would rise.
Safe haven flows: Yen may regain its safe-haven status in global risk-off environments.
FX volatility: USD/JPY could see large swings, creating opportunity for traders and hedging needs for corporates.

The Clock Is Ticking

As South Korea edges closer to a potential agreement on won strengthening, global attention now turns to Japan. Will Tokyo follow suit under diplomatic pressure? Or will historical scars and economic pragmatism lead it to resist?

One thing is certain: currency policy is no longer just an economic issue—it’s a geopolitical instrument. The yen is caught in a global tug-of-war, and how Japan responds will shape not just its own future, but the strategic balance of power in the Indo-Pacific.

IBAFIN