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If there's one thing that fans and critics of Donald Trump agree on about the US president-elect, it's that he's a man of the 1980s.
It was his heyday, when the legendary New York tycoon's worldview on trade, economics, geopolitics and culture seemed to be solidified. At that time, Trump viewed Japan as a monster that was eating America’s lunch and robbing America’s future. Today, China under Xi Jinping has become the target of Trump’s ire.
But what if Japan also finds itself at the top of Trump’s enemy list, and Tokyo doesn’t bargain?
Japanese Prime Minister Shigeru Ishiba’s country has few ways to trigger the Trump 2.0 team. One is that it has not shown sufficient compliance in offering major trade concessions to Washington. Another reason is that the Liberal Democratic Party led by Shigeru Ishiba has failed to act quickly to ensure that military spending accounts for more than 3% of gross domestic product.
The real trigger may be a weakening yen that goes against Trump's 1980s view of global dynamics.
As Trump prepares to return to the White House on January 20, confronting China is his top economic priority. By imposing 60% tariffs on Chinese goods, hampering its technology industry, and causing the dollar to depreciate against the yuan, Trump's team has a tough job ahead.
But the yen’s depreciation is sure to draw Trump’s attention. Especially when he is briefed by anti-China Trump advisers like Peter Navarro and hard-line trade officials like Robert Lighthizer and Jamieson Greer. A key variable is that a weaker yen could lead Chinese leader Xi Jinping to argue that Beijing should also lower its exchange rate.
In the past, Washington has largely allowed Tokyo to pursue beggar-thy-neighbor policies. The idea is that if results justify the means and a weak yen revives Asia's second-largest economy, the United States will win, too. Even Trump 1.0 turned a blind eye to this, as Japan, then led by Trump cheerleader Shinzo Abe, pursued a soft yen strategy.
Things may be very different this time. Since his shock election victory on November 5, Trump has rejected Ishiba’s requests for a meeting. Although Japanese officials claim Trump will meet Ishiba in February, Trump has been meeting bilaterally with countless other world leaders — except Japan. To make matters worse, Trump World even invited Xi Jinping to attend Trump’s inauguration ceremony.
As Trump launches an unprecedented trade war in Asia, the last thing Tokyo wants is to be on Washington's second-tier list. Especially at a time when the Japanese economy is facing huge uncertainty.
Trump honed his “tariff man” protectionist worldview four decades ago. That was back when Michael Keaton was starring in the 1986 movie efforttells the story of Japanese companies exploiting Detroit autoworkers. At that time, at the height of Japan's “bubble economy” era, Washington reached the “Plaza Accord” monetary agreement at a New York hotel once owned by Trump.
Michael Crichton immortalized this period in his best-selling book Asahi. Businessman Trump complained on a daytime talk show that Japan “systematically sucks the blood out of America – sucks the blood out!” They've gotten away with murder. They eventually won the war.
It's not that fast, because deflation was already here in the 1990s. Last spring, champagne corks popped as the union received its largest wage increase in 33 years. This seems to indicate that the virtuous cycle of wage and consumption growth that the Bank of Japan has worked hard to create under 25 years of zero interest rates has arrived.
Not so much. By the end of 2024, it was clear that the national average salary was not keeping up with inflation. With China exporting deflation, the Bank of Japan decided on December 19 that Japan was not ready to normalize interest rates. He kept the official interest rate at 0.25%.
This is a rather paradoxical question for global investors piling into Nikkei 225 Stock Average stocks. If the Bank of Japan thinks Japan still needs economic training wheels after all this time, why are they betting on Japanese companies?
Although China faces serious challenges, especially a huge real estate crisis, Xi Jinping's team is working hard to improve China's competitiveness in semiconductors, electric vehicles, biotechnology, aviation, robotics, renewable energy, artificial intelligence and high-speed rail. China's success in electric vehicles has prompted Honda Motor Co and Nissan Motor Co to join forces. Few Japan watchers have this matchup on their bingo cards.
The whole reason why the Bank of Japan is reluctant to raise interest rates is because of the yen. Last July, when Ueda's team raised interest rates to their highest level since 2008, the yen's surge spooked Nikkei investors. It also shocked Tokyo's political establishment. It’s not hard to believe that Shigeru Ishiba’s Liberal Democratic Party and its coalition partners are lobbying the Bank of Japan not to tighten monetary conditions anytime soon.
Trump's return only raises the stakes. If the yen/dollar exchange rate breaks through the 160 level from 157 now and moves slightly towards 170, how long might it take before Trump 2.0 threatens to extend 100% tariffs on Mexican-made cars to Japan? And South Korea.
Never mind that Trump’s tariffs, dream of a weak dollar and “trickle-down” tax strategy all started in the 1980s. They seek to revive a global system that no longer exists. Trump seems keen to return to the 1980s, which could draw Japan into the war in ways Tokyo never expected.
