Investing.com -- A potential turning point in U.S.-Japan trade relations may emerge as Washington pushes to include foreign exchange (FX) discussions in bilateral talks, according to Citi strategists.
Japan’s Finance Minister Katsunobu Kato is set to meet U.S. Treasury Secretary Scott Bessent in Washington this week for a second round of trade negotiations.
While currency policy was not on the agenda during last week’s visit by Japan’s Minister for Economic Revitalization Ryosei Akazawa, Citi notes that “Secretary Bessent has made it clear that he wants trade talks with Japan to include discussion of exchange rates.”
The idea of a targeted currency agreement between the two nations has sparked speculation over a possible “Plaza Accord 2.0,” a reference to the 1985 deal that led to a sharp appreciation in the yen.
While Citi says the prospect of a broader multilateral deal akin to a “Mar-a-Lago Accord” remains unlikely for now, bilateral discussions with Japan may be different.
“We think the U.S. may have ¥100/$ in mind,” strategists said, adding that Japan could tolerate gradual yen appreciation to ¥130/$, potentially settling at ¥120/$ as a compromise.
The original Plaza Accord led to a significant dollar correction in the mid-1980s. Citi references Yoichi Takita’s account of the 1985 negotiations, noting authorities then targeted a 10-12% drop in the dollar, with an initial target of ¥200/$.
“The currency pair broke to this level in just three months,” the bank highlights, and the dollar eventually fell to ¥120/$ by the end of 1987, well beyond initial expectations.
A similar trajectory today would imply a move from the current level of ¥140/$ down to ¥120/$, with the U.S. stance shifting at around ¥100 and concern rising below ¥75. Yet, Citi cautions against assuming history will repeat itself.
“The financial and economic situation is completely different, of course,” strategists said, and Bessent’s market background contrasts with Baker’s legal approach during the original accord.
Rather than intervening directly in currency markets, Citi suggests Bessent may focus on structural adjustments such as pushing the Bank of Japan toward “monetary policy normalization.” In that context, yen strength would be encouraged through domestic policy shifts rather than coordinated FX action.
Still, a deal appears distant. Citi believes the Trump administration could hold off on tariffs if Japan agrees to broader concessions, but any exchange-rate-specific outcome from this week’s meeting is unlikely.
“We would not expect a market-moving announcement on exchange rates to come out of this week’s finance ministers’ meeting,” the note concludes.
Following recent U.S. market volatility tied to tariffs, the dollar has weakened more than expected against the yen, approaching a technical floor around ¥140/$. While a near-term rebound to around ¥145/$ is possible, Citi maintains a bearish medium- to long-term outlook for USDJPY.