The elections in both the U.S. and Japan are in the record books. And in their aftermath, there is a unique opportunity to renew and strengthen the alliance, the most important bilateral relationship for both nations.
Challenges notwithstanding, the U.S.-Japan friendship is being fortified, in part, by growing recognition of the economic security threats posed by China: The superpower flouts international norms to make its exports more competitive, then hacks into the manufactured goods it sells abroad, ranging from sensitive communications devices, to cargo cranes and port systems.
The imperative for creating a wide-ranging, modern and muscular economic security system on this front is boosting U.S.-Japanese coordination on matters like defense, tariffs, currencies, global energy and sanctions. The 80th anniversary next year of the end of World War II will take on new significance, militarily, economically and technologically.
To confront the geostrategic situation with China, President-elect Donald Trump has said that trade policy and security policy will be more closely linked. Several of his key advisors have suggested that tariff levels may be influenced by the quality and depth of the economic and security relationship with the U.S. -- meaning genuine friends of the U.S. could face much lower tariffs than countries that are not. Any tariffs that Washington places on Japan will surely be a small fraction of those on China.
Japan can therefore become one of the biggest benefactors of the Trump era, as its competitiveness relative to China will improve by leaps and bounds. As companies that trade with the West increasingly look to leave China, Japan is in a great position to remain close to the region's supply chains while benefiting from a skilled workforce, a business-friendly environment, and a close relationship with the U.S. of primary strategic importance. Enhanced Japanese investment in the U.S., meanwhile, can serve as an engine for American and global economic growth.
This boost to the Japanese economy -- a result of American policy changes -- could be multiplied by the overhaul of the Japanese pension system. For decades, retail savers in Japan have been effectively forced to keep their assets in low- (or zero-) yielding vehicles. But reforms to the pension system open up a broader universe of investable products, allowing savers to find vehicles which better suit their needs.
At the same time, growth in the Japanese economy has propelled it out of deflation and helped it escape subzero interest rates. Inflation in Japan has been running near 2% since mid-2022, after decades stagnating near or below zero. The normalization of Japan's economy creates optimism for future returns, which encourages investment in useful economic activity; firms and savers don't want to invest in companies producing products whose prices will go down.
Pension liberalization comes at just the right moment, both to capitalize on the evolving strategic environment and to capitalize on shifts in the Japanese and global economies. In politics, as well as in geopolitics and investing, earning rewards requires taking risk; chaining yourself to the safest option risks stagnation or slow decline.
And risks are lurking, as political change brings the threat of volatility. As Japanese politics enters a new phase of uncertainty after the ruling Liberal Democratic Party lost its lower house majority, leaders need to assure a transition that avoids turbulence. Meanwhile, Trump has a strong democratic mandate for disruption, most especially of American trade policy. While America can shift trade policy without triggering excessive levels of volatility -- as it did in 2018-2019 -- it will be important to act with an eye toward financial markets.
As the U.S.-Japan relationship blooms into even closer friendship, it will be imperative for our nations to confront risks together. The Japanese and global economies offer widening investment and political opportunities driven in no small part by this friendship, and now is the time to begin harnessing them.
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