Well, so much for Tokyo avoiding Donald Trump’s trade wrath. That, after all, has been Prime Minister Shinzo Abe’s master plan these last 28 months.
His November 17 sprint to Trump Tower, nine days after Trump’s shock election win, was meant to secure Tokyo a pass on Washington’s tariffs.
Things haven’t exactly gone to plan. Though Abe’s economy is not a direct target, it’s sustaining considerable collateral damage from Trump’s taxes on steel (25%), aluminum (10%) and roughly US$250 billion of mainland goods (25%).
Exports fell 1.2% in February year-on-year, the third monthly drop.
Even so, Abe’s team managed to throw Trump off the scent a bit. The White House had long been agitating for a bilateral trade deal. Abe’s government’s delaying tactics bought Tokyo some time. It also managed to stay out of the firing line as Trump’s negotiators targeted Xi Jinping’s economy.
But that all changed this week, when Trump announced an official pivot to Tokyo. Not only are US officials looking to remove barriers on farm and industrial goods, but also on services. This last area has been a red line of sorts for Tokyo, one he’s been trying to finesse. Serious steps to open services and investment might irk Abe’s party.
The same goes for discussions about the yen. No policy did more to produce the longest expansion since the 1980s than the yen’s 30% decline since late 2012. Abe’s hand-picked Bank of Japan governor, Haruhiko Kuroda, flooded the economy with liquidity and cornered bond and stock markets.
That growth engine is at risk as Trump angles for a weaker dollar. In pressuring Beijing, Tokyo and, eventually, Seoul, to stop “manipulating”exchange rates, Trump seeks another Plaza Accord or sorts. The reference here is to a 1985 deal among industrialized nations – Japan mostly – to accept higher exchange rates. From 1985 to 1987, the yen surged 50%.
Granted, such an appreciation won’t happen again. But the yen’s return to, say, 100 to the dollar from 110 now, would savage exports and the Nikkei Stock Average. It also would be the death knell for Abenomics.
If executives didn’t hike wages when record profits were pouring in, they’re even less likely now to help Tokyo kick off a virtuous consumption cycle.
Trade negotiations themselves also might weigh on corporate sentiment. Trump, it goes without saying, doesn’t play fair. Just ask Xi’s negotiators. They’ve spent several months jousting with Washington, only to learn this week that Trump’s tariffs will probably remain, deal or not.
“We’re not talking about removing them,” Trump said March 20. “We’re talking about leaving them for a substantial period of time because we have to make sure that if we do the deal with China that China lives by the deal.”
And then there’s the national security trump card. For years, Trump accused allies of taking advantage of Washington’s security umbrella. Earlier this month, Trump hinted at a way to, in his mind, make amends: a “cost-plus 50” scheme.
In other words, countries from Germany to Japan to South Korea would bear the full cost of hosting US troops and add 50% on top.
It’s more the stuff of mafia dons than democratic leaders. Team Trump is playing coy, suggesting extortion is not in the cards. But the odds are, this, or something approximating it, will soon be official US policy. Trump views it as a chance to appear strong on the world stage as scandals and investigations swirl at home.
All this puts Abe in a bad spot as growth weakens, his approval ratings drop and his Liberal Democratic Party fights him on trade concessions. Japanese farmers, a key LDP voting bloc, are bracing for lower tariffs from last year’s trade pact with the European Union.
Bowing to Trump could cause Abe problems with coalition partners.
Abe had hoped this year’s local and upper-house elections would solidify his power. He hoped, too, to hike the sales tax from 8% to 10% to curb runaway government debt. All that is now getting trumped as the White House sets its sights on Tokyo.