Japan With/Against Trump?
As Donald Trump pressure other countries with his tariff tactics, every country, even U.S. allies, are trying to figure out whether they should retaliate or comply. Japan, as a long term U.S. ally, is of no exception but they seem to have taken a different path than Canada when dealing with Trump. It provides another perspective for other countries in how to deal with Trump's U.S..
After the first blood drawn from Canada and Mexico, Donald Trump has announced there will be a 25% universal tariff for steel and aluminum coming into the U.S., without any exemption even for traditional U.S. allies. While most countries immediately suggest retaliation of same magnitude or scrambling their heads on other tariff category and probing U.S. companies (China), Japan seems to be taking another approach.
As one of the biggest economy globally and long term U.S. ally, the Japan seems to be taking a more active and cooperating approach towards the Trump led U.S.. Before the U.S. announced universal steel and aluminum tariff, the first U.S.-Japan summit seems to be productive (golden age ties reported by Nikkei) and make Trump happy by suggesting Japan will increased their investment in the U.S. to one trillion USD. Not only it was mentioned in the summit, but also the Japan’s Foreign Trade Council says USD one trillion investment plan in the US is challenging but achievable on this Wednesday which further shows the Japanese commitment towards their words and it is likely to keep Trump happy. The imposing of multiple tariffs is just a negotiation tactic for Trump to reduce the U.S. trade deficit by pressuring other countries to either purchase more U.S. products or relatively increasing the incentive to have a plant in the U.S..
Moreover, Japan also suggested they will import more U.S. energy product, especially LNG. This is another area that differentiates Japan and other countries, instead of taking a forceful beating, they are thinking of ways to avoid direct conflict and collaborate. Japan is a big energy exporter and looking into their inflation dynamics, it is not hard to see the spike in energy prices have been a big chunk in CPI. A good energy deal with the U.S. could help keep CPI in a more controlled manner and see inflation to not either fly too high or back to old deflationary Japan.
In the future, one can expect such deal to be ironed out. There is another area the U.S. and Japan can work on, the FX rate. The slump in JPY have begun to be an issue for Japan as it pressure business margin and could overheat cost input inflation, which is something the BoJ would not like to see. On the other hand, Trump would like to see a narrowing trade deficit between U.S. and Japan. A collaboration between the Fed and BoJ to intervene in the FX market and keep USD/JPY strength in check, indirectly reducing the attractiveness of Japanese goods (narrows trade deficit) and help the stabilization of JPY, a win-win situation for both Japan and the U.S..