On Monday, US President Donald Trump said he told the leaders of Japan and China that they should not keep lowering the value of their currencies because it would be unfair to the United States.

"I've called President Xi, I've called the leaders of Japan to say you can't continue to reduce and break down your currency," Trump said at the White House. "You can't do it because it's unfair to us. It's very hard for us to make tractors, Caterpillar here, when Japan, China and other places are killing their currency, meaning driving it down," he added. The US could compensate for the disadvantage its manufacturers face by enacting tariffs, Trump argued, rather than ranting over the phone about such attempts. 

"So all of these things add up. And the way you solve it very easily is with tariffs," he said. Japan's Nikkei stock index dropped over 1% on Tuesday after comments from Donald Trump caused the yen to rise briefly. This highlighted the risks Japan's economy faces due to uncertainty over US trade and currency policies. The yen reached 149.11 per dollar, its highest level since February 28.

When asked about Trump's remarks, Japan's Finance Minister Katsunobu Kato stated that the government is not taking any measures specifically to weaken the yen. Kato stated at a press conference in Tokyo on Tuesday that "Japan has confirmed its basic stance on currency policy" during bilateral conversations with US Treasury Secretary Scott Bessent on January 29 and with the G7 nations, including the US. 

Japanese Economy Minister Ryosei Akazawa said the government steps in to control the yen only when its movement is driven by speculation. Japanese officials are worried that Trump might make direct comments about the yen, which could create market instability and slow down Japan’s economic recovery. Last month, Prime Minister Shigeru Ishiba said he and Trump agreed that their finance ministers would handle any issues related to currency exchange rates. Although a weaker yen helps Japanese exports, Tokyo has recently intervened in the currency market to stop the yen from falling too much, as this increases import costs and reduces consumer spending. Japan's top currency official, Atsushi Mimura, recently said that the yen’s recovery reflects the country’s strong economy and the possibility of an upcoming interest rate hike by the central bank.

Japan has successfully convinced G7 and G20 members to agree that extreme currency fluctuations are undesirable. This agreement allows Japan to step in and stabilise the yen if its value changes too quickly due to speculation. However, US President Donald Trump's criticism of the weak yen and uncertainty over his tariff threats could make it harder for the Bank of Japan to decide when to raise interest rates. Japan's central bank ended its large-scale financial support last year, believing the country was finally overcoming years of deflation and slow economic growth.

With inflation staying above 2% for almost three years, the Bank of Japan (BOJ) is considering raising interest rates again after increasing them to 0.5% in January. Most economists surveyed by Reuters think the BOJ will raise rates one more time this year, likely in the third quarter, bringing them to 0.75%.