India’s recent comprehensive agreement with Japan, signed during Prime Minister Narendra Modi’s visit to Tokyo on August 29–30, 2025, marks a strategic pivot toward non-Western democracies like Japan and South Korea. Transactions would notably be denominated in Japanese Yen (JPY) rather than U.S. dollars (USD).
The first rationale that comes to the mind is that India is trying to hedge against Western volatility (Donald Trump in this latest round) by aligning with nations that share democratic values but maintain distinct cultural identities. This shift underscores India’s effort to diversify its economic and strategic partnerships while navigating global trade disruptions.
Trump-Tariffs are a push towards diversification
Trump’s 2025 trade war, with U.S. tariffs hitting India with 50% duties on key exports like textiles and electronics, has disrupted markets. Japan and South Korea, despite being U.S. allies, face 15–25% tariffs on automobiles and steel these days. And that is causing economic ripples in their respective countries.
For instance, Japan’s Nikkei 225 dropped 7.8% on April 7, 2025. India’s $87 billion export market to the U.S. is at risk, prompting New Delhi to seek alternatives. The Yen-based India-Japan agreement, with Japan pledging $68 billion in investments, offers a buffer against U.S. economic coercion, reducing reliance on dollar-denominated trade vulnerable to Washington’s whims.
The Yen advantage
The decision to conduct the India-Japan agreement in Yen is pivotal. Unlike dollar-based transactions, which expose India to U.S. sanctions and currency fluctuations, Yen-based deals stabilize bilateral trade and investment. The current JPY-INR exchange rate, approximately 0.59 INR per JPY, favours Japan’s stronger currency, but India benefits from reduced exposure to dollar volatility.
This is especially crucial now as the INR had hit record lows against the USD in 2025 due to tariff pressures. A 2018 India-Japan currency swap agreement worth $75 billion, allows the Reserve Bank of India to access Yen for liquidity.
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And that underscores this strategy’s longevity. So, by transacting in Yen, India can tap Japan’s capital markets at lower costs. That could support infrastructure and defence projects like the Unified Complex Radio Antennae (UNICORN) co-development. That aside, South Korea’s expertise in semiconductors complements India’s manufacturing ambitions, while Japan’s investment could fuel “Make in India” initiatives.
A Yen-centric approach also aligns with India’s broader engagement with non-Western democracies. Japan and South Korea, unlike Western powers, share developmental histories and cultural frameworks closer to India’s. This is a major ground to foster trust. The Quad membership aligns them with their strategy to counter China. Worked out successfully, the trio (India Japan and South Korea) can expect an onward journey that is without the ideological baggage of the West.
Balancing SCO and QUAD is a delicate dance
Yes, India’s simultaneous engagement with the Shanghai Cooperation Organisation (SCO) and Russia-India-China (RIC) trilateral complicates its pivot somewhat. The SCO Summit in Tianjin (August 31–September 1, 2025) saw PM Modi and President Xi Jinping pledge cooperation. But India’s refusal to endorse a pro-Pakistan SCO statement reflects caution.
![Narendra Modi with Vladimir Putin at the SCO [Source: Narendra Modi/X] | The Yen Gambit](https://sp-ao.shortpixel.ai/client/to_webp,q_lossy,ret_img,w_1000,h_955/https://forpolindia.com/wp-content/uploads/2025/09/modin.jpeg)
RIC’s revival, pushed by Moscow, aims to counter U.S. dominance. But there is the existing Indo-China border tension that limits its scope. Under such a situation, the Yen-based Japan pact offers a pragmatic counterweight. This could allow India to diversify without fully aligning with China, should New Delhi so wish.
Challenges of the Yen pivot
The Yen focus has drawbacks. India’s trade deficit with Japan is $18.9 billion in imports versus $6.2 billion in exports in 2024–25. This could widen with increased Yen transactions, straining the INR. That aside, Japan’s economic challenges, which includes a weak Yen (down 0.56% against INR in the last 30 days), may limit investment flows.
Moreover, deeper ties with U.S. allies like Japan and South Korea risk misperceptions in Beijing. This could be a hindrance for India in navigating the SCO dynamics. Finally, Donald Trump. His unpredictable tariffs could also force Japan to prioritize its U.S. trade negotiations, sidelining India.
A strategic necessity?
However, India’s Yen-based alignment with Japan, and by extension South Korea, is a calculated response to Trump-tantrums. By leveraging Yen transactions, India looks to shield itself from dollar volatility and U.S. economic pressures. And keep its doors open to accessing advanced technology and capital at the same time.
This pivot to non-Western democracies also strengthens India’s Indo-Pacific stance without sacrificing its SCO or RIC engagements. The caveats here are two: One, the management of trade imbalances, and two, China’s reactions. These two will test New Delhi’s diplomatic finesse.
Nonetheless, it looks like in a world of economic uncertainty, India’s Yen gambit has the potential to take the shape of a strategic necessity for preserving its autonomy and resilience.
