Synopsis:

Credit Agricole argues that if Japan fails to reach a trade deal with the US before the July 9 tariff pause ends, it would likely boost the JPY, given its tight links to equity market sentiment, broader risk aversion, and its historical role as a hedge against US stagflation.

Key Points:

• Nikkei Correlation:
  • A failed deal would likely weigh on Japanese equities, and since the Nikkei is positively correlated with USD/JPY, this would pull the currency stronger.

• Negative Signal for Global Trade:
  • A breakdown in talks with Japan — the US’s fifth largest trading partner — would signal broader difficulties in finalizing deals with other major economies, dampening global risk sentiment.

• Boost to JPY Safe-Haven Appeal:
  • Rising trade uncertainty and the risk of reciprocal tariffs reactivating could fuel risk-off flows, historically supportive for the yen.

• US Stagflation Hedge:
  • No deal raises the threat of tariff-induced stagflation in the US.
  • The JPY has historically outperformed as a hedge in periods of rising stagflation risks.

Conclusion:

Credit Agricole sees a no-deal scenario between Japan and the US as a clear near-term positive for the JPY, via weaker Japanese equities, increased risk aversion, and the yen’s proven role as a safe haven and stagflation hedge in the G10 FX space.