Summit diplomacy, a sterling rate shock, and the yen at 160

What makes this summit unusual is not just who is in the room but who arranged it. A US president flying to China to meet Russia's leader is a signal that Washington is treating Beijing as the venue and, implicitly, as a guarantor of whatever comes next. That matters for the Ukraine war because China has so far refused to condemn the invasion and has supplied Russia with dual-use goods. If Xi is now hosting a peace process, he gains influence over the outcome, and Europe, which has borne most of the economic cost of the war through energy prices and refugee flows, gets a smaller seat at the table.

The EU's response is the part worth watching carefully. Forming a five-country team for peace talks is a way of asserting collective weight, because no single European state carries enough power to be taken seriously by Washington alone. The risk is that a deal struck in Shenzhen locks in territorial lines before Europe has agreed to them. The precedent that fits is the 1938 Munich conference, where Britain and France accepted terms on Czechoslovakia without Czechoslovakia in the room. That parallel has obvious limits: Ukraine is not absent, and the US is not simply appeasing Russia. But the structural problem, a powerful mediator moving faster than the affected parties, is the same.

The Bank of England is caught between two targets that are pulling in opposite directions. Its legal mandate is to keep inflation (the general rise in the price level across the economy) at 2%. Inflation is heading for 5%. The standard tool is to raise the interest rate it charges banks, which ripples out into mortgage rates and business loans, cooling spending and easing price pressure. That mechanism works well when inflation is caused by too much demand chasing too few goods. The Bank's own forecasts suggest the spring spike will be partly driven by energy prices, which a rate rise cannot directly reduce.

The honest evaluation here is that one more rate rise probably will not be enough to bring inflation back to 2% on its own, but the Bank cannot be seen to do nothing when its forecast shows prices at 5%. That is a credibility problem: if people stop believing the Bank will act, they start expecting higher inflation, and then wages and prices adjust upward to match, making the problem self-fulfilling. So the December hike is as much about anchoring expectations as it is about the immediate effect on spending. Whether that is the right call depends on how much of the inflation is genuinely demand-driven, and the data on that is not yet settled.

Japan's situation is a near-perfect illustration of the impossible trinity in open-economy macroeconomics: a country cannot simultaneously control its exchange rate, set its own interest rates freely, and allow capital to move in and out without restriction. Japan has kept interest rates very low for years to support growth. The US has raised rates sharply. Capital flows toward higher returns, so money moves from yen into dollars, selling yen and pushing the exchange rate down. Japan cannot simply raise rates to match the US without risking a recession in an economy that has barely grown for three decades.

The tool Japan reaches for instead is direct intervention: the Ministry of Finance instructs the Bank of Japan to sell dollars from Japan's foreign reserves and buy yen, pushing the rate back up. Japan used this in 2022 when the yen last hit 160, spending roughly 9 trillion yen (about $60 billion at the time) across several rounds. It worked in the short run but did not change the underlying interest-rate gap that was driving the weakness. That is the evaluation: intervention buys time but does not fix the cause. If the Fed keeps rates high through 2027, as its own projections suggest, the yen will face the same pressure again. The question worth sitting with is whether Japan can keep defending 160 indefinitely, or whether it eventually has to let the yen find a new floor.

A trade deal between two countries works by reducing tariffs, the taxes each country charges on the other's imports, which lowers the price of traded goods and encourages more of them to cross borders. The gains are not evenly spread. Indian textile exporters, who currently face US tariffs that make their goods more expensive than competitors from countries with existing deals, would gain the most immediately. Indian pharmaceutical companies, which supply a large share of generic medicines to the US market, could also see their position secured rather than left vulnerable to future tariff threats.

What I find telling about Jaishankar's framing is that he said the remaining changes are needed on the American side. That is a negotiating signal as much as a factual update: it puts pressure on Washington to move, and it tells domestic audiences in India that the government has already given what it can. The timing matters too. The three-way summit in Shenzhen, covered in Story 1, gives the US a reason to want India visibly in its camp rather than drifting toward a China-Russia orbit. A trade deal announced around the Modi-Trump meeting would serve both leaders politically. Whether the deal holds up in the US Congress, where trade agreements face scrutiny from both parties, is the part this announcement does not settle.