Japan has strongly opposed linking monetary policy to trade issues, countering a demand by the United States to include a provision to prevent currency devaluation of its trading partners. Economy Minister Toshimitsu Motegi met with US trade representative Robert Lighthizer for a second round of trade talks in Washington on Thursday, while Finance Minister Taro Aso had a separate discussion with US Treasury Secretary Steven Mnuchin, with the topic of currencies on both agendas. The US administration is looking to close the trade deficit with Japan, much of it owing to car exports, and Mnuchin has also said in the past that in future trade deals, including ones with Japan, Washington would like to include a provision to deter currency manipulation. “I told him that Japan cannot agree to any debate linking trade policy with monetary policy,” Aso said after a meeting with Mnuchin. “Japan won’t discuss exchange rate matters in the context of trade talks.” I told him that Japan cannot agree to any debate linking trade policy with monetary policy. Japan won’t discuss exchange rate matters in the context of trade talks Taro Aso The US is concerned that some of its trading partners have unfairly devaluated their currencies through market interventions to help their exporters gain a competitive advantage, which would in turn exacerbate trade and current account imbalances. The Dollar Index, a gauge of the US dollar’s performance against its major trading partners, reached a new high for the year on Thursday. “[The rally in the dollar] has been driven less by US growth news, but more by sluggish activity and softer monetary policy prospects in the rest of the world,” said Chris Turner, global head of strategy and head of Europe, the Middle East and Africa and Latin America research at ING Bank. “Most fund managers have a growing conviction that the world economy is entering into a period of low growth and low inflation – or secular stagnation.” The US Treasury has placed Japan, China, Korea, India, Germany, and Switzerland on its monitoring list due to potentially questionable foreign exchange policies. The central banks in countries including China, Japan and South Korea are often suspected of buying or selling US dollars to stem sharp fluctuations in their currencies, but there are no official figures to show how much money is spent on the so-called “smoothing operations.” Japan has attributed its low yen exchange rate to massive monetary policy easing aimed at achieving its 2 per cent inflation target, and not at gaining export advantage. Data on Friday showed that Japan’s industrial output fell in January to March at the fastest pace in almost five years, suggesting the economy may post a mild contraction in the first quarter as manufacturers struggle with the US-China trade war. Last year, the US incorporated into in a major trade agreement commitments to avoid unfair currency practices for the first time, setting a precedent for future trade deals. The US, Mexico, Canada Agreement, which replaced and updated the North American Free Trade Agreement, contained a chapter on “macroeconomic policies and exchange rate matters” even though there was no controversy regarding the exchange rates of the three countries. South Korea has also announced it agreed to disclose details of its veiled foreign-exchange interventions to enhance transparency from this year. On Thursday, President Xi Jinping said China would keep the yuan currency stable within a reasonable range, but would not engage in any currency devaluation, as he delivered a keynote speech at the second Belt and Road Forum in Beijing. “China will continuously improve the yuan exchange rate formation mechanism and keep the yuan exchange rate basically stable at a reasonable and balanced level,” Xi said. Xi also said China would strengthen macroeconomic policy coordination with other major economies. The speech was delivered just hours after an announcement by US President Donald Trump that Xi would visit the White House “soon” as hopes of a trade deal to end the US-China trade war increase.