* Yen rises vs dollar despite widening US-Japan rate
* Doubts over Trump's steps, scandals over Japan PM supports
* Firm yen could help deflect US accusations of weakening
By Shinichi Saoshiro
TOKYO, March 23 The Japanese yen's recent rise
against the dollar has defied conventional market wisdom, but a
stronger currency may actually support Japan as it confronts the
Trump administration on matters of trade and foreign exchange.
The Federal Reserve's explicit plan to raise interest rates
this year, in stark contrast to the Bank of Japan's persistently
accommodative monetary policy, should in theory be a reason for
investors to move out of the yen and seek yield in the
greenback, the so-called carry trade.
However, growing investor doubts over President Donald
Trump's economic stimulus plans have hurt the dollar in recent
weeks. Meanwhile, Japanese Prime Minister Shinzo Abe, now in a
rare fifth year as leader, is battling scandals on two separate
issues, driving funds into the safe haven yen.
While a stronger yen is typically bad news for Japan's
exporters, it provides some reprieve for an economy that the
United States has accused of exploiting a cheap currency for
"The Japanese authorities are aware of these trade threats
and have been proactive in trying to manage the relationship
with President Trump," economists at Oxford Economics said in a
report earlier this week.
And if the idea of a weak yen becomes a point of contention
between the two countries, Japan could guide the yen to be
stronger than Oxford Economics' baseline projection of 118 to
the dollar, they said.
The yen is now around 111 per dollar, the highs last
seen just after Donald Trump was elected U.S. president in
November. It hit 110.735 on Wednesday, its highest since late
Analysts expect the yen to remain strong.
"Dollar/yen should be around 114 considering current
U.S.-Japan yield spreads, but it has drifted down to 111 on
worries over political risks," said Yukio Ishizuki, senior
currency strategist at Daiwa Securities.
Ishizuki expects the dollar's value will fall towards 110
yen in the next three months, occasionally even dropping below
The yen's rise comes conveniently just weeks before U.S.
Vice President Mike Pence's visit to Japan and meeting with
Deputy Prime Minister Taro Aso, who doubles as Japan's finance
minister, to discuss bilateral economic issues.
Japan's large trade surplus with the United States has
stirred fears that the Trump administration might press for a
stronger yen. Data on Wednesday showed Japan's exports to the
United States grew the most in roughly two years in February.
"There appear to be concerns about the feasibility of U.S.
policies going forward," said Shusuke Yamada, senior strategist
at Bank of America Merrill Lynch in Tokyo, referring to the
dollar flagging against the yen.
"Wariness that Trump won't tolerate a stronger dollar, for
example a rise by the currency to 120 yen, also seems to be
limiting the scope for the dollar to gain against the yen."
In theory, the yen should be weaker. Yield differentials
between U.S and Japanese two-year bonds were at 1.6 percentage
points earlier this month, their widest since August 2008.
The U.S.-Japan long-term yield differential rose above 2.5
percentage points in December, its widest in seven years, and
has remained close to that level.
The tentative revival of interest in carry trades, in which
investors borrow cheap currencies such as the yen at low rates
and invest in assets that offer higher returns, should also
technically weaken the yen.
As Abe faces questions on his ties to a nationalist school
involved in a murky land deal and his defence minister faces
calls to resign, political uncertainty is an added risk.
Japanese retail traders are betting against the yen and have
tripled their long dollar positions over the span of a few days
according to some trading platform providers.
And, the dollar's woes may reverse if concerns about Trump's
policies abate. Investor confidence in the dollar faces a
crucial test later Thursday when Trump's own party votes on the
government's healthcare legislation, a rejection of which could
delay tax reform and the infrastructure boost.
(Editing by Vidya Ranganathan and Sam Holmes)