TOKYO – Fresh off getting outmaneuvered by Tokyo on a “trade deal,” President Donald Trump’s team is going even further to demonstrate its ignorance of the state of play in Japan.
Case in point: US Treasury Secretary Scott Bessent complaining that the Bank of Japan isn’t hiking interest rates fast enough, when his boss is the reason officials can’t tighten policy. As Bessent told Bloomberg this week: “They’re behind the curve. So they’re going to be hiking and they need to get their inflation problem under control.”
Sure, just as soon as Bessent gets Trumponomics under control. Does Bessent not understand that four months ago, BOJ Governor Kazuo Ueda was on track to get Japanese rates the furthest away from zero they’ve been in 26 years, only to get derailed by Trump’s tariffs?
To be sure, it’s hard to know what the global face of the Trump 2.0 economy really believes and what he must say on television to keep his job. And it’s painfully obvious what Bessent is up to here: trying to weaken the dollar via Japanese monetary policy as Federal Reserve Chair Jerome Powell slow-walks US rate cuts. Fair enough, but such comments are inspiring more eye-rolling in Asia than intellectual debate about BOJ policies.
In Tokyo, in fact, the BOJ has become a backburner issue. With Japan expected to grow just 0.7% in the current fiscal year and inflation pressures easing, the odds of the BOJ raising rates at its September 18-19 or October 29-30 meetings have dwindled to the point that economists have pivoted to other topics.
Yes, inflation is still way too high in Japan. But news that Japanese wholesale prices rose just 2.6% in July year on year suggests that the urgency for raising rates is diminishing.
Perhaps Bessent has missed, too, that the Nikkei 225 Stock Average, on the same day he spoke to Bloomberg, rallied to an all-time record. The reason: delight over a US-Japan tariff deal that, in the end, demanded little of Tokyo.
While a 15% Trump tax on Japanese goods is no one’s idea of fun, it’s a world away from the 35% the White House threatened. Japanese automakers are sure happy to be paying, in theory, a lower rate than the 25% Detroit must pay on imports from plants and suppliers in Canada and Mexico.
To be sure, much of this is still shrouded in confusion as Trump gets an earful from unhappy US automakers.
As Matt Blunt, president of The American Automotive Policy Council, puts it, “any deal that charges a lower tariff for Japanese imports with virtually no US content than the tariff imposed on North American-built vehicles with high US content is a bad deal for US industry and US auto workers.”
For automakers, there’s a bit of a deja-vu-all-over-again dynamic here. As Blunt explains, the trade framework Trump negotiated with the UK did more to lower tariffs to 10% on some luxury cars built in England, such as the Rolls-Royce, Bentleys, Land Rovers, Jaguars and Aston Martins, than aid Detroit. The risk of Trump World reneging has the team of Japan’s top tariff negotiator Ryosei Akazawa anxious.
There’s also been controversy over a practice called “stacking,” whereby one 15% tariff is piled atop existing tariffs. After considerable back and forth, Japan claims Team Trump has agreed not to stack tariffs. For now, at least. All this is the product of a hastily assembled tariff deal with no written materials.
The bottom line is that “without a written agreement between Japan and the US, no promise or claim of mutual understanding is secure until it appears in an Executive Order,” says Richard Katz, who publishes the Japan Economy Watch newsletter.
Lawmakers are deeply worried, too, that Trump could simply have a bad day and decide the US and Japan should negotiate a new, new tariff arrangement with its closest ally in Asia.
“Washington is just randomly shooting, and they are shooting some like-minded countries from behind,” says Taro Kono, a member of Japan’s House of Representatives, who’s often mentioned as a future prime minister.
And that US$550 billion that Japan is expected to invest in the US at Trump’s direction? What Trump calls a “signing bonus” to be handed over to the White House – it’s”our money,” as he said – Tokyo views as more of an aspirational endeavor with a vague timeline, perhaps over a number of years.
Rather than forking over a pile of cash, Japanese Prime Minister Shigeru Ishiba’s team is eyeing a series of loans, grants and financial guarantees run through government-linked organizations like the Japan Bank for International Cooperation and Nippon Export and Investment Insurance.
Suffice to say, the logistics of this are going to take lots of back and forth and loads of additional negotiation sessions. In the meantime, Ishiba’s inner circle hopes the US courts will rule Trump’s tariffs are unconstitutional, enabling Japan to avoid this whole mess.
Also, Tokyo will watch closely to see how South Korea proceeds with the $350 billion it agreed to deploy in the US and what the European Union does about the $600 billion worth of US energy purchases Trump is demanding as part of its deal.
None of these really matters in the end if Trump and Bessent don’t get China to the table. Trump World’s stuck-in-1985 policy mix has missed that in our globalized era, where supply chains matter more than national borders, bilateral trade deals mean less than multilateral ones.
That is, unless Trump manages to get one with China’s nearly $18 trillion economy. Combined, the US and China represent $45.5 trillion of gross domestic product (GDP).
As tariff pain weighs on the US economy, Trump’s challenge is to convince his base that the inflation, market chaos and extreme uncertainty of the last several months were somehow worth it.
The only way, really, is a big, beautiful China trade deal that Trump can tout as proof he’s still got some “art of the deal” game left. Xi is playing hard to get, though, scoring another 90-day extension on talks.
As Xi’s China complicates the US Treasury’s 2025, Bessent is having to do some Japan maintenance. One avenue is prodding the BOJ to raise rates in lieu of its inability to cajole the US Fed to lower them. Another: soothing nerves in Tokyo about its $1.1 trillion exposure to Trumponomics.
Japan is by far the biggest holder of US Treasury securities. That’s a rough place to be when Trump is working to morph the Fed into the People’s Bank of China by stripping it of its independence.
Trump, of course, has threatened to fire Powell for not bowing to his demand for big rate cuts. Bessent, commenting on how much Fed easing he wants, argues that “we should probably be 150, 175 basis points lower” from the current 4.25% to 4.5% target range.
If the Fed is perceived as becoming an extension of Trump’s West Wing, the dollar would drop for all the wrong reasons. And Trump’s assumption that the Fed slashing rates at his behest would lower borrowing costs might not end well.
It’s very likely that Powell cutting rates sharply in a cloud of Trumpian suspicion would result in long-term yields surging. Already, the US is spending more on interest payments on the national debt each year than on the American military.
Tokyo worries deeply about the prospect of sustaining hundreds of billions of dollars of losses if Trump crashes the US government debt market. But then Tokyo has also had to fend off an avalanche of misinformation from Trump World. Trump claims, for example, that Tokyo’s non-tariff barriers keep Japanese from buying US cars.
The real reason is that Japan makes high-quality, fuel-efficient cars geared for narrow Japanese streets and claustrophobic parking spaces, while oversized American vehicles often lack practicality on Japan’s roadways. And here’s Bessent adding to the mountain of misconceptions as he argues that volatility in Japan is putting US Treasuries at risk.
“There’s definitely leakage from — the Japanese have an inflation problem,” he says. Bessent added that he’s spoken with BOJ head Ueda recently, noting: “My opinion, not his — they’re behind the curve. So they’re going to be hiking.”
Not exactly. Certainly not until Bessent finds the courage to counsel Trump against the forever trade wars he seems to be launching in real time. Thanks to the collateral damage from the tariffs, the odds are rising that the BOJ’s next move will be to cut rates as GDP takes hits, not raise them.
Follow William Pesek on X at @WilliamPesek
