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Japan’s $550 Billion US Fund May Spur Mini FX Accord, Citi Says

The $550 billion investment fund that formed part of Japan’s tariff deal with the US may draw heavily on the Asian nation’s $1.3 trillion currency reserves, according to analysts at Citigroup Inc.

Treasuries are a key component of these reserves and the Citi analysts see potential that a flow-on effect of drawing on them could be higher yields on long-term US debt. This in turn may prompt the US to lean on Japan to extend the duration of its holdings.

“It is not that we expect a major turnaround in multilateral currency policy that would result in something like a ‘Mar-a-Lago accord,’ but there is the possibility that some type of bilateral ‘mini-Mar-a-Lago accord’ could be formed,” Citi analysts including Osamu Takashima said in a note. “We believe there will tend to be an ongoing bias toward USD weakness and JPY strength from the perspective of currency policy.”

The duration of Japan’s holdings of US Treasuries is estimated at 3-5 years, but the investment and financing facility in the tariffs deal is expected to invest in the US with terms of 10-20 years, it said.

The yen has recently been under pressure as political uncertainty and tariffs cloud the outlook of the Bank of Japan’s rate hike path. The currency is the worst performer among its Group-of-10 peers over the last three months.

President Donald Trump signed an executive order last week implementing his trade agreement with Japan, which included a promise that Japan will create a $550 billion fund. Yet the fund has been surrounded by questions as the trading partners have described its mechanism differently.