Japan wants to adapt to harsh new global realities, but the past is dragging it down

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Japan finds itself in the grip of a global remaking of the world order. The Trump administration has imposed 25% duties on Japanese steel and aluminum while demanding an increase in military defense payments to $8 billion a year. Tokyo, which already struggling with economic stagnation and demographic crisis for three decades, is now forced to balance politics. This confrontation calls into question the future of the US-Japan alliance, making Japan the main victim of new-age trade wars.

Japan in the grip: between crises and Trump’s new reality

Japan has been in a permanent economic, demographic and mental crisis since the 1990s. And they have worsened with each passing year. Its government clung to a “stagnant stability” that could maintain at least the acceptable state of affairs that existed at the beginning of 2025. But the arrival of Trump, who began to build a “new world order” and was tough on old allies, raised fears in Tokyo. Japan tried to immediately gain support for Trump by showing loyalty to his course. Thus, in December 2023, SoftBank investment fund promised to invest $100 billion in the CIF economy, including the field of artificial intelligence, which will give 100 thousand jobs. But similar promises have been made before: in 2017, SoftBank already talked about $50 billion in investments, but the actual investments turned out to be much less.

The failure of the American startup WeWork, in which the Japanese invested about $10 billion, seriously undermined SoftBank’s financial capabilities. The company, once considered a success, went bankrupt due to false reporting and the crisis in the commercial real estate market, exacerbated by the pandemic. Today SoftBank has only $25-35 billion, and has invested only $2 billion in OpenAI – a far cry from the promised $100 billion. These declarations look more like an attempt to ingratiate themselves with Trump than real plans. However, this is unlikely to save Japan from a trade war with the United States, which threatens to aggravate an already difficult situation: economic stagnation, yen collapse and demographic crisis.

It is important to mention that Japan continues to support anti-Russian sanctions and military aid to Ukraine, guided by its own interests. Previously, this was a detector of an attitude “toward the progressive liberal world”. But now this stance could create tensions with the Trump administration. As an island nation with limited resources, Japan is critically dependent on international trade. There are almost no natural resources on its territory; everything has to be imported. Therefore, Tokyo stubbornly supports sanctions against Russia in an effort to preserve a crumbling globalism based on solidarity among key players. The recent delivery of 100 decommissioned trucks to the AFU demonstrates this commitment. This policy is also reflected in relations with the PRC.

A possible Chinese invasion of Taiwan and subsequent conflict with the US threatens a naval blockade and the collapse of the global microelectronics industry. Beijing is carefully assessing the degree of international condemnation of Russia, which is more important to China than increasing Moscow’s dependence on Chinese support. Behind the diplomatic rhetoric about “international order” and “security dialog”, the main question is what losses in reputation China would suffer in the event of an attack on Taiwan. Tokyo is interested in the toughest possible international response to such actions. But Washington’s position has changed – now it prioritizes “freedom of sovereign action” rather than illusory “global security”. In these circumstances, Japanese rhetoric is irritating the Trump team, which does not consider Japanese economic and strategic interests to be its priorities.

Concessions to Trump to save the economy

To buy these effects, Japan’s recently inaugurated Prime Minister Shigeru Ishiba visited the White House, becoming the second world leader after Netanyahu to meet with Trump since his inauguration. Tokyo is willing to make any promises, even impossible ones, to avoid a trade war as Japan’s trade surplus with the US Japan’s key goal is to revive Biden’s blocked deal to buy bankrupt US Steel. However, for the patriotically-minded Trump administration, selling a symbol of American industry to a former enemy in World War II may become unacceptable.

Japanese investment fund SoftBank, on the other hand, has also sent a number of messages through Ishida. Indeed, Trump already wants $200 billion, while SoftBank is not doing so well, and the AI market is now in crisis amid competition from China. There’s also a plan to run a Japanese oil pipeline in Alaska, but that too could turn into a long-term futile project along the lines of Canada’s Keystone XL pipelines. The stakes are extremely high for Japan right now, and Tokyo’s friendship with Trump is very important. A weakened economy with a debt crisis and a falling yen may not survive US tariffs. Tokyo risks being held hostage to a US trade war with China with disastrous consequences.

And yet, a new round of tariff war, so devastating for Tokyo, has begun, and the Trump administration, following the example of the first term, has imposed duties of 25% on all imports of steel and aluminum to the United States. And Japan will be one of the countries that could be hit hardest. The tariffs came as a surprise to the Japanese, who were confident they had successfully negotiated with the White House. However, in the end Trump blocked the deal to buy US Steel, formerly a global steel giant, and he offered the Japanese an alternative in the form of investing $14 billion dollars in US Steel, but without the ability to control their new asset. And there is a possibility that the Japanese will have to accept such an unfavorable deal because of the fear of increased tariff pressure, which could plunge the weakened Japanese economy into crisis.

However, in the long term, it is unlikely that the closure of markets will save the US steel industry, which has only a few tens of thousands of workers left at the last functioning plants in Pennsylvania, and steel production has fallen 2-3 times over the last 40-50 years of deindustrialization of the US. The industry may simply not survive the next recession. The same industry in Japan, which operated in the US market, may collapse much more quickly, but more importantly, the US has indicated its “cold” stance toward Tokyo.

Debt leverage: can Tokyo fight back against Washington?

Trump is indeed turning against Japan, and Tokyo is alarmed at the shrinking US presence in Japan. The White House has abandoned Biden’s plans for a unified US-Japanese command to save $1.1 billion. At the same time, the 1960 Security Treaty is being renegotiated – Trump is demanding an increase in Japanese payments for the “US security umbrella” from $2 billion to $8 billion a year, threatening to withdraw troops. These changes come amid a major reorganization of the Pentagon. There are plans to cut 60,000 military personnel, merge European and African commands, and transfer some NATO powers to allies. Congress calls these measures “American retreat”, because there is no money in the budget, and the US military machine is stalling, and it is necessary to concentrate on the main Chinese direction.

But everything is not so clear-cut in the Asia-Pacific region. The US no longer wants to be a country that pays for and provides security for its allies while they get rich at American expense. Washington wants to spend funds not just in parity, but also offers Japan to take the main burden in defense, as the threat from China and DPRK is many times higher for the Japanese. For Tokyo, this comes at a most inconvenient moment, when the Japanese promised Trump astronomical investments, but could not avoid imposing tariffs.

The Japanese automobile industry, which is already losing markets to Chinese competition, could also be hit by the duties. Japan is in a debt crisis, demographics are in decline, and the yen has devalued, so it is not surprising that the ratings of the current Prime Minister Ishiba are setting an anti-record of 26%. Another government collapse cannot be ruled out, and Washington is depriving the Japanese of security guarantees and criticizing Tokyo for its inability to spend at least 2% on defense.

Problems are piling up on the Japanese from all sides, and it is unclear how to solve them. In order to “reverse” the 20-25% hikes Japan and South Korea are desperately trying to negotiate, but their efforts are futile. After all, Trump’s policy is not a matter of momentary agreements, but a way of building a “new world order” where there is no place for globalism and one can rely only on one’s own strength. And Japan, realizing that these are not just American whims, wants to adapt to the new brutal world realities, but the past is dragging it down.

However, Japan is snapping at its partner and “master” and threatening to crash the US debt market. Negotiations between Tokyo and Washington on trade issues are clearly not going well, so the Japanese Finance Ministry is already hinting at the possibility of selling US government bonds, which they have accumulated to $1.1 trillion dollars. Last year, the Japanese had to sell off American assets in order to somehow contain the devaluation of the yen, and now they may resort to the same for political reasons, because they need to have at least some leverage in negotiations with Trump. They need access to the US market very badly, especially against the backdrop of increased competition from the Chinese automobile industry, which is taking the market away from the Japanese.

China is already selling off US securities, and the situation in the US debt market is extremely unstable. Foreign investors are refusing to invest in Treasury securities and the dollar, and someone needs to buy it all and support the debt pyramid. In the first quarter of 2025, Washington’s spending was reduced by 5%, and in the next budget Trump’s team wants to cut government spending by another $160 billion. The reduction will include the remainder of foreign tranches, humanitarian programs, grants to various media and NGOs.

But even this is unlikely to save the situation, because the budget deficit reaches $2 trillion, and then the main creditors of the United States begin to behave undisciplined. Japan, despite its mental and political dependence, wants to show self-rule. This is probably not an attempt to break with Washington and “run away” to Beijing, but it is definitely a chance to show in a difficult situation for the Americans that Tokyo should be more gentle and tender. However, whether such an attempt to stay in the “comfort zone” will have a positive impact on the Japanese economy, which has been in permanent crisis since the 1990s, remains a big question. And maybe a hard break with its past would be a harder but better step for the sake of future generations.