There is a view that the U.S. diplomatic stance on correcting yen weakness could change depending on the outcome of the U.S. midterm elections, and attention is focused on the future course of Japan-U.S. relations and foreign exchange. Amid a three-way situation, concerns about fiscal expansion are casting a shadow over a recovery in the yen.
The midterm elections will be held on 3 November, and there are suggestions that the Republican Party could lose its majorities in both houses. If that happens, there is a view that the Trump administration could enter a phase of using trade and foreign exchange as diplomatic bargaining chips against a backdrop of domestic gridlock.
If expectations spread that fiscal expansion will be restrained, the dollar could become more prone to buying, creating a headwind for an administration seeking to revive manufacturing. Against this backdrop, views are emerging that pressure to correct yen weakness could intensify further.
Meanwhile, China's yuan is near a 4-year high at around 6.66 yuan to the dollar, and the improvement in U.S.-China relations may partly reflect a willingness to tolerate yuan appreciation. However, there is also a view that if President Trump loses influence in the midterm elections, his incentive to make further concessions would weaken. The People's Bank of China has in fact indicated that it intends to curb the pace of yuan appreciation.
In Japan, the yen has not recovered, and yen weakness was also an issue at the Japan-U.S. summit in September. Concerns about fiscal expansion within the Takaichi administration remain strong, and there are suggestions that a policy shift that does not encourage yen weakness is needed.