"They're not currency manipulators," Trump said in the interview.
The president also said putting the label on China now could jeopardize U.S. talks with Beijing on the North Korean threat, according to the Journal.
What the White House is doing is "they're going back to a very traditional China policy which is a disappointment to many of their hardcore supporters," said Gordon Chang, author of "The Coming Collapse of China." "There's going to be political punishment."
Trump "will be punished by autocrats in Beijing," Chang said. "He's showing weakness."
Slapping the label on China had been one of Trump's key campaign promises. He also appointed China hawks such as Peter Navarro to key positions on trade, and, until recently, favored Steve Bannon and his nationalist stance.
Now, advisors who appear to have a less protectionist viewpoint such as Gary Cohn, director of the U.S. National Economic Council and former president of Goldman Sachs, seem to have more sway over Trump.
Analysts told CNBC that Trump's backtracking on China Wednesday was a recognition of reality.
In the Treasury Department's most recent review in October, China met only one of three criteria set down by the United States before it can label the communist country a currency manipulator. The Treasury is expected to update the report this month.
"The question now is whether getting Chinese cooperation on North Korea has become so important that the administration is willing to accept token gestures from China that reduce the trade deficit but do nothing to address the breadth and depth of Chinese industrial policy," said Scott Kennedy, a China expert at the Center for Strategic and International Studies.
Read the full interview in The Wall Street Journal here.
Watch: Gartman says Trump wrong about China currency