Japan has deepened its economic relationship with the United States just days ago, signing a bilateral trade pact. This decision comes amid escalating trade war over tariffs between the two countries. Japan, with a mind-boggling $1.1 trillion in US Treasury bond holdings, is the biggest holder of these securities in the world. This strategic financial position has given Japan leverage in negotiations, particularly with the threat of a 25% tariff looming over its exports.
Japanese finance minister has raised concerns over the country’s large public bond holdings. He called them a strong “card” that Japan can play in ongoing negotiations with the US. The symbolism of financial strength was key to their success in negotiations. Japan wanted to preserve an agricultural bunker while conceding to increase its imports of US rice. This latest step is being interpreted as a compromise to avert the full weight of the tariffs that threatened to do significant damage to Japan’s economy.
The backdrop of these negotiations is significant. As the US prepares to implement tougher tariffs on multiple countries effective August 1, Japan’s decision to move forward with a deal reflects a calculated strategy. Rather than wait to find out how international markets would respond, Japan decided to act. This deal is the best outcome possible for any country running a large trade surplus with the US. Or it could be the most palatable deal of all the bad options.
Japan’s negotiators knowing how high the stakes were would show emotion outburst during negotiations showing how high the stakes were. With increased talk of potential joint retaliation from Japan, the EU, and Canada, Japan evidently realized it was necessary to get to better terms. The stakes were high, and urgent action was critical. On the day of that deal, Japan rolled out the red carpet for EU leaders in Tokyo. This meeting, again, underscored Japan’s central place in the evolution of international trade.
In terms of economic investment, Japan’s private sector is set to back investments totaling approximately half a trillion dollars in the US. This commitment underscores the mutual benefits expected from the new trade agreement and highlights Japan’s intent to strengthen economic ties across the Pacific.
The US has retaliated by hitting 15% general tariff Japan’s goods. This action puts the onus on both nations to maintain a mutually beneficial trade equilibrium. In light of these tariffs and broader market conditions, Andrew Bailey, Governor of the Bank of England, remarked that “the most crowded trade in the market at the moment is ‘short dollar,’” indicating a shift in market sentiment regarding currency valuation.
With Japan and the US at loggerheads on key issues, Japan’s finance minister continues to be personally engaged in the intensive negotiations. For the White House, achieving a good deal with Japan would be a major diplomatic coup. It does much more than deepen bilateral economic relations — it acts as a deterrent to other countries that might consider retaliation.
“Essentially breaking down” – Andrew Bailey, Governor of the Bank of England