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In 1987, Donald Trump picked up full-page ads in several major US newspapers targeting Japan. “For decades, Japan and other countries have used the United States,” the ad said.
Trump declared that Japan “cannot be hampered by the enormous costs” of protecting itself, and “creating a strong and vibrant economy with unprecedented surplus.”
Trump’s criticism of Japan was popular at the time. In the 1970s and 1980s, Japanese industry, subsidized by the Japanese government, ran ahead of the rest of the world, and the US market was flooded with sophisticated cars and gadgets.
The US trade deficit swelled, and Japan took hold of the American spirit. American politicians opposed Japan’s “unfair” trade practices and threatened tariffs. Books containing classics such as Ezra Vogel’s Japan have jumped off the shelf.
But everything changed. The shift was already in progress at the time of Trump’s ad. Two years ago, developed countries convened at the Plaza Hotel in New York and agreed to intervene in the currency markets to weaken the US dollar. According to TS Lombard (see chart), US imports from Japan, which in 1986 had a surprising 22% of all US imports, began culling, which was started by a fall in the dollar. Adjusted depreciation of the dollar ended in 1987 under the Ruble Agreement.
In 1989, the Japanese housing bubble burst, and it was growing slowly for decades. As TS Lombard’s Rory Green pointed out, the Plaza Accord was the main catalyst. Because the yen is strong and exports are low, the bubble of trust increased in Japan, and later came flying out.
Economic lies at home and high trade tensions between the US and Europe have changed Japanese companies, particularly automakers, in particular, their approach. They began investing in the US rather than simply selling. They built factories, supply chains and assembly lines across the Mexican and Canada borders in American communities. “They decided to approach US consumers,” says Maya Solis, director of the Brookings Institute’s Center for Asian Policy Studies.
“The investor side of the relationship has transformed both countries from trade competitors to economically interdependent,” she says.
It took a while for all the changes to be felt. Tensions remained high for several years, as exemplified by US President Bill Clinton’s tariff volley and trade skirmish with Japan.
But the tide has changed. The US Japanese FDI began to be recorded in the 1990s. Japan was ranked the largest or second largest US each year from 2017 to 2024, according to the US Bureau of Economic Analysis and the Department of Trade and Industry in the Ministry of Economy. Japan then appeared as the largest foreign sovereign of the US Treasury. The two financial systems are intertwined.
The trade deficit shrunk over time as Japan lowered some of its trade barriers, the yen strengthened against the dollar, and the US economy began in the late 1990s and early 2000s.
By Donald Trump’s first term in office, when the US president began in 2017, relations with Japan had improved significantly. However, his thinking was shaped in the previous era.
He accused Japanese industry of “fraud” and once again criticised Tokyo’s relatively low defense spending. Trump took a major blow to Japan in 2017 by withdrawing the proposed trans-Pacific Partnership Trade Agreement between 12 Pacific Rim countries and the United States. By 2018, Japan was one of several countries that had been hit by heavy tariffs on steel and aluminum.
But the relationship has regained its footing. Japan has begun increasing its defensive spending in line with Trump’s demands, but that remains low.
And the two sides successfully negotiated trade contracts in 2019, lowering Trump’s tariffs and increasing room for US imports to import into Japan. During the following year and the Biden administration, Japan continued to take the kind of measures Trump had wanted.
It was a surprise that Japan was once again at the crosshairs of Trump this year. “Mutual” tariffs, which initially threatened Japan at 24%, were particularly high. And the transactions negotiated by both sides in July are not at first glance a major reprieve for Japan. In exchange for the US reducing Japan’s tariff rate to 15%, Japan will invest $5500 billion in the US, lifting trade barriers for US auto parts and agricultural products, and buying more US planes.
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But the deal remains good for Japan, according to David Boring of Eurasian Group, previously Obama and the first Trump administration’s US trade negotiator. “Japan was able to make many concessions Trump could wield. But when you peeled it off, the concessions weren’t that big. Japan was inclined to (invest in the US and buy those aircraft) anyway, allowing them to avoid scrutiny of other issues.”
A reset might be a good thing for both sides.
