Japan: Mission Accomplished?

U.S.-Japan reached a trade deal with 15% reciprocal tariff. While details are to be finalized, it seems steel/aluminum tariffs and military spending are not included in this deal. The deal came as a surprise as Japan seems to have been solid on requesting 0% auto tariffs but should be welcome by the BoJ. If approved by the parliament, the uncertainty surrounding the trade front will be largely dismissed, freeing BoJ's hand to change monetary policy and achieve their inflation target. However, after the Upper House election last week, the current ruling LDP coalition has become a lame duck government with no majority control over both the Upper and Lower house. It maybe complicated for the Japanese government if smaller parties decided to collectively vote against the deal.

The main obstacle in previous negotiation is on auto an agriculture. The deal has lowered the 25% tariffs on auto and auto parts to 15%, without a quota. However, Trump also mentioned Japan will open their market towards U.S. agricultural product which did not seem to have faced steep obstacle before. The deal also included a joint venture between U.S. and Japan to develop LNG projects in Alaska. 550 billion USD will be invested into multiple sectors by Japan, including those of national security and AI, further tightens the bilateral tie. Yet, stick points on military spending remains. A previous suggested 3.5% GDP military spending has led to a negotiation collapse and it will be tight for Japan to spend 3% of GDP for military, given the current fiscal space. 

This deal came after LDP loses their majority and could be potentially viewed as a political attempt by Japanese PM Ishiba to keep his chair. While it is hard to say whether the deal would face more obstacle in the Diet, it seems inevitable for the Japanese government to make some compromise to gain the political support needed to avoid a renegotiation of deal with Trump. PM Ishiba will remain on the chopping board despite his intention to stay, for the tough words on protecting the agricultural sector were proven empty.