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Japanese yen hits 7-month high amid trade war fears

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The Japanese yen appreciated against the dollar on Friday afternoon, causing the exchange rate to fall below 142. The yen reached its highest level in approximately seven months as the escalating US-China trade war triggered a sell-off of the dollar against other major currencies.

The yen gained nearly 3% against the dollar. Other Asian currencies also strengthened, with the Malaysian ringgit rising 0.72% against the dollar. The South Korean won and the Singapore dollar also appreciated. The euro strengthened against the dollar to levels not seen since February 2022.

Shoki Omori, a global desk strategist at Mizuho Securities, stated, “The yen has risen because there is clearly a risk-off mood in the markets, with Trump imposing larger-than-expected tariffs on China.”

Omori added that recent sell-offs in US Treasury bonds have led investors to move away from the dollar and towards safe-haven assets such as the yen, Swiss franc, and gold. Japan’s large economy, political stability, and liquid financial markets make its currency an attractive safe-haven asset.

US Treasury bonds are traditionally viewed as a low-risk, safe-haven investment. However, the intensifying trade war has increased uncertainty, prompting investors to exit these assets and move into cash.

In the latest escalation of the trade war, China raised its retaliatory tariff rate against the US to 125%. US President Donald Trump had already increased tariffs on China to 145%, even while halting “reciprocal” tariffs on exports from other countries.

The tit-for-tat tariffs caused US stocks to fall sharply on Thursday, while concerns about the economic consequences dampened investor sentiment.

Weakness in US Treasury bonds has played a role in the yen’s strengthening. On Friday morning, the 10-year US Treasury bond yields, a benchmark for long-term interest rates, rose to 4.46% after falling below 4% following Trump’s announcement of new tariffs on trade partners last week. Bond yields move inversely to prices.

The yen typically weakens when US bond yields rise and widen the gap with Japanese bond yields, but strong safe-haven flows have overridden the usual downward pressure on the yen.

Omori from Mizuho predicted that 10-year US Treasury bond yields would fall as the year progresses. Omori estimates that the Federal Reserve will cut interest rates at least two to three times, depending on the health of the US economy.

He stated that a downturn in the US economy would mean lower yields on 10-year Japanese government bonds. “Of course, we may experience shocks depending on what happens in the US, and we must not forget that the Japanese government may issue more bonds for fiscal policy,” he said.

The yen’s appreciation dragged down the share prices of Japanese exporters on Friday. Shares of Nissan Motor closed down 6%, while shares of Toyota Motor fell 5%. Technology stocks such as Furukawa Electric lost around 6% in value.

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Japan’s prime minister skips NATO summit amid alliance strain

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In the fifth month of Donald Trump’s second administration, the United States and its most crucial ally in the West Pacific, Japan, appear to be out of sync.

On Monday, Japanese Prime Minister Shigeru Ishiba announced he would not attend this week’s NATO summit in the Netherlands. Additionally, he neither supported nor condemned Trump’s decision over the weekend to attack Iran’s nuclear facilities.

These are just the latest signs of discord that have emerged in recent weeks. Japanese Foreign Minister Takeshi Iwaya is set to visit Washington for a QUAD foreign ministers’ meeting with his counterparts from India and Australia later this month, but the expected two-plus-two meeting of US and Japanese foreign and defense ministers will not take place.

A US official told Nikkei Asia in late May that an inter-agency agreement had been reached on the US side to demand that Japan increase its defense spending to 3% of its gross domestic product (GDP) as part of ongoing trade negotiations aimed at reducing tariffs.

However, a new figure of “3.5%” began circulating in Washington after US Defense Secretary Pete Hegseth met with his Australian counterpart, Richard Marles, during the Shangri-La Dialogue in Singapore on May 30.

A Pentagon statement released two days after the meeting said, “Secretary Hegseth conveyed that Australia needs to increase its defense spending to 3.5% of its GDP as soon as possible.”

US officials, led by Under Secretary of Defense for Policy Elbridge Colby, began stating that the new “fixed demand” for Asian allies was 3.5%.

Last week, Pentagon spokesman Sean Parnell formalized this by issuing a statement indicating that European allies had set a new “global standard” for US alliances at 5% of GDP. This statement was related to NATO Secretary General Mark Rutte’s recently announced spending targets of 3.5% for military procurements and 1.5% for related infrastructure.

A Japanese official told Nikkei that Tokyo was open to discussions on increasing defense spending, but the process appeared disorderly. Officials noted that Washington had not officially communicated any figures to Japan. It was also reported that Japanese officials had difficulty communicating directly with Colby.

Another Japanese official stated that if Japan were to increase its defense spending (currently 1.8% of GDP, with plans to reach 2% by fiscal year 2027), it would be a sovereign decision by Tokyo and would need to be explained with justifications that could be presented to the Japanese public.

Zack Cooper, a senior fellow at the American Enterprise Institute think tank, said the Trump administration had been “pretty inconsistent” in its approach to Japan, and this uncertainty would create a challenge for the alliance.

“Ishiba’s cancellation of the NATO meeting and the two-plus-two meeting, when put together, certainly form a concerning set of signals,” he said.

Cooper assessed, “To me, this suggests that Tokyo wants to wait for the upper house elections [on July 20] rather than engage directly with the Trump administration.”

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US cries to China as Washington begins airstrikes in Iran

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While the Middle East is going through one of its most tense periods, the world has been shocked by the news of a direct attack by the United States on Iran’s nuclear facilities. Washington has announced that Iran’s nuclear facilities no longer exist. At the same time, Tehran has warned in a strong tone that it will respond to this aggression.

This action was immediately met with widespread regional and international reactions. The United Nations, the European Union, global powers such as Russia and China, and America’s traditional allies in the West each took their own stance.

At an emergency meeting of the United Nations, Secretary-General Antonio Guterres described the move as a dangerous turn in an already crisis-ridden region. A wave of criticism has also emerged within the United States, with some describing the attack as successful.

At the same time, a number of lawmakers from both the Republican and Democratic parties consider Trump’s action to be without congressional authorization and unconstitutional.

Some reactions:

Russian envoy: US attack carried out without any provocation from Iran.

US Representative: The Iranian regime should not have nuclear weapons.

Iran’s ambassador to the Security Council: America once again sacrificed its security for Benjamin Netanyahu.

Israeli Ambassador to the Security Council: America changed the course of history by attacking Iran.

Rafael Grossi, the head of the International Atomic Energy Agency: Military attacks should not be carried out on nuclear facilities, saying he is ready to immediately travel to all countries regarding this case.

UK UN envoy: Military action alone cannot address concerns about Iran’s nuclear program, saying his country was not involved in Iran attack, referred to concerns about Iran’s nuclear program and said that military action alone cannot permanently address concerns about Iran’s nuclear program. He called on Iran to exercise restraint and urged the parties involved to return to the negotiating table.

France: Now is the time to end the attacks and return to negotiations.

But now why US cries to China for help to reopen Strait of Hormuz

Soon after a US airstrike in three locations, Iran closes the Strait of Hormuz, one of the world’s most important shipping routes. Now this move puts the US in trouble and US Secretary of State Marco Rubio has called on China to prevent Iran from closing the Strait of Hormuz.

However, it seems that the US is too late and according to Iran’s state-run Press TV, the decision was made by Iran’s Supreme National Security Council.

The US understands that any disruption on the supply of oil would have profound consequences for the economy and wants to play an emotional card with China to convince Iran to reopen the route as Beijing is also one of the largest buyers of Iranian oil.

It is reported that 20 percent of the world’s oil passes through the Strait of Hormuz, and major oil and gas producing countries in the Middle East use this route to export energy.

Meanwhile, US President Donald Trump has said that regime change is inevitable if the Islamic Republic cannot “make Iran great again.” His statement came following US military strikes on Iranian military facilities.

Iran: Game is not over even assuming the complete destruction of the nuclear sites

Ali Shamkhani, advisor to Ayatollah Ali Khamenei, the religious leader of Iran, has said in response to the US attacks that even assuming the complete destruction of the nuclear sites, the “game is not over”.

“Even assuming the complete destruction of the sites, the game is not over; because the enriched materials, indigenous knowledge, and political will remain intact,” he said.

He noted that “now the political and operational initiative with the right to self-defense is in the hands of the side that knows how to play smart and avoids blind shooting.”

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Japan diverges from G7, urging restraint in Israel-Iran conflict

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Japanese Prime Minister Shigeru Ishiba has affirmed Tokyo’s position of calling for “maximum restraint” from both Israel and Iran, despite a G7 statement earlier this week that supported Israel’s “right to self-defense.”

During a meeting of ruling and opposition party leaders on Thursday, Ishiba stated, “What the foreign minister said is the stance of the Japanese government. The G7 is the G7,” as reported by Tomoko Tamura, head of the Japanese Communist Party.

Japan, a close US ally in Asia, has long maintained friendly relations with Iran and has historically adopted a neutral approach to Middle East diplomacy, distinguishing itself from the pro-Israel stance of US administrations. Tokyo relies on the Middle East for the overwhelming majority of its crude oil imports.

G7 leaders convened in Kananaskis, Canada, and issued a statement backing Israel’s attacks on Iran. The statement affirmed Israel’s right to self-defense and condemned Iran as the “main source of regional instability and terrorism.” On June 13, when Israel’s attacks on Iran began, Japanese Foreign Minister Takeshi Iwaya declared: “The use of military force while diplomatic efforts are ongoing… is completely unacceptable and a source of deep regret. The Japanese government strongly condemns these actions.”

Iwaya added, “Japan is gravely concerned about the continuation of retaliatory attacks and strongly condemns any actions that could further escalate the situation.”

He continued, “Japan urges all parties to exercise maximum restraint and strongly calls for a de-escalation of tensions.”

During the meeting of party leaders, Tomoko Tamura, head of the Japanese Communist Party, highlighted the apparent contradiction between Iwaya’s statements and the joint G7 communiqué, suggesting the government was applying a “double standard.”

Prime Minister Ishiba responded, “What the foreign minister said is the stance of the Japanese government. The G7 is the G7.”

Meanwhile, the foreign minister announced at a press conference on Friday that a total of 87 Japanese nationals and their family members had been evacuated by land from Iran and Israel. Sixty-six individuals were evacuated from Iran to neighboring Azerbaijan, and 21 were evacuated from Israel to Jordan.

Following additional requests from Japanese citizens, a second land evacuation from Iran is scheduled for Saturday. Currently, there are approximately 220 Japanese nationals in Iran and about 1,000 in Israel.

In preparation for potential air evacuations, the government plans to dispatch two Air Self-Defense Force military transport aircraft to Djibouti in East Africa to have them on standby. With airports in Iran and Israel closed, Iwaya noted that the aircraft could be used if, for example, the airports reopen and conditions permit an airlift.

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