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What the Euro-Japanese Free-Trade Deal Means for the Markets

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After four years and nearly two dozen meetings, Tokyo and Brussels have finally come to an arrangement, shaking hands on a free-trade deal between Japan and Europe. Coined the ‘Cars for Cheese’ agreement, this economic arrangement was made on Thursday, 6 July, and is set to bolster EU exports to the East Asian island nation by an approximate €20 billion a year, writes FXTM Staff Writer, Nikola Grozdanovic.

This is not the first trade deal Brussels has taken down from the shelves and dusted off recently. First came CETA, a treaty between Europe and Canada, in May and now Japanese Prime Minister Shinzo Abe, President of European Council Donald Tusk and the president of the European Commission, Jean-Claude Juncker, have forged an economic pact that looks set to lower tariffs and barriers on practically all traded goods between the EU and Japan. In many ways, it’s a bold reaction to Donald Trump and his isolationist position.

Aside from the US reaction, though, how the economic landscape will shift thanks to this deal is what every financial pundit is wondering. While the heart of the deal is centred on an increase of Japanese automobile imports into Europe and European foodstuffs into Japan, trading costs are expected to be lowered or removed completely for nearly all traded goods. Put together, Japan and Europe make up nearly a fifth of the world’s GDP, and just under 40% of all exported goods.

The deal came on the eve of the G20 summit, which was reflected in the currency trading markets. The Euro was energised enough to handle dovish lows and make up some ground against the British pound. Trading sentiment was lifted as well thanks to the prospect of greater access to Japan (i.e. the third-largest economy in the world) and the associated increased demand for EU agricultural products.

If everything goes as planned, free-trade between Japan and the EU trading Bloc could prove to be an obstacle for American manufacturers, who may start seeing US opportunities dwindle in both markets. On the other hand, Prime Minister Abe is keen for Donald Trump to re-evaluate his position on the Trans-Pacific Partnership (TTP), which the US withdrew from earlier in the year. He will be hoping this new deal could reignite US interest in TPP.

How this news will affect a post-Brexit UK and forthcoming negotiations is another interesting point that will likely influence investor sentiment. The EU-Japanese trade deal is expected to be fully engaged in 2019, just as Britain leaves the Bloc. How forex trading will be influenced, and whether Brexit will be seen in a more positive light now the door has been opened to Japanese trade in Europe, is still up for debate. In theory, if Japan can achieve a free-trade deal with Europe, the chances of the U.K. succeeding with its own are much more favourable.

For one thing, exports from Britain are unlikely to be subject to the same regulatory barriers that Japan (or even Canada) are. The U.K.’s long history of exporting and importing under EU regulations, standards and rules should not prove to be a sticking point in any future EU-UK trade talks. For the currency markets, a possible free-trade arrangement between the two parties might go a long way towards augmenting positive sentiment towards Sterling.

As it’s still only based on a handshake and general term agreements, the details of the EU-Japanese trade deal are yet to play out in the markets. Across the globe, traders are eagerly anticipating Washington’s reaction, waiting to see what – if any – implications this new trade deal could have on the USD.

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