What is Japan's play on Trump's tariffs?

Japan was hit with worse-than-expected news last week when the U.S. announced a so-called reciprocal tariff of 24% on all Japanese imports, with the levy on Japanese automotive imports set to rise tenfold to 25%.

You would not be alone if you asked how the administration of Donald Trump arrived at those figures, given that Japan’s average tariff on U.S. imports is about 3%, while U.S. tariffs on Japanese goods average around 1.5%. Most of that gap comes from Japan’s higher tariffs on agricultural products like sugar, rice and meat — and there is no levy at all on U.S. auto imports to Japan.

So, what makes the new rates reciprocal? The 24% figure was calculated by dividing the 2024 U.S.-Japan trade deficit of $68.5 billion by total U.S. imports from Japan of nearly $145 billion. The U.S. Trade Office confirmed that this simplistic approach was chosen because it can be applied uniformly to all trading partners worldwide, avoiding further disputes over the tens of thousands of tariff categories in the American regulatory system.

This was no scalpel approach, but more like attacking it head-on with a broad sword.

Japan had expected some consideration for being the largest source of foreign direct investment in the U.S. from 2019 to 2024, with total investment of around $860 billion. Japan is also the largest foreign investor in the vast majority of U.S. states.

A less discussed figure is that America’s total direct investment in Japan is about $85 billion — approximately 10% of Japan’s investment in the United States. Additionally, Japan is by far the largest holder of U.S. government debt. And yet, Japan still received no consideration for those contributions.

So, how is Japan responding? It has become a political issue with opposition parties gearing up for the national election in July.

They criticize Prime Minister Shigeru Ishiba as being too weak (which is true) and are demanding action. In response, Ishiba is flailing about, promising things like an “unprecedented” response, some form of retaliation or a pointless, pro forma appeal to the useless World Trade Organization.

Some opposition members naively suggest Japan follow the examples of Europe and Canada, but those countries' responses have been emotional and combative. The best course for Japan is to do the opposite of what those governments are doing.

The challenge for Japan is that suddenly buying more from the U.S. won’t significantly reduce the deficit. The nation could also follow Israel’s approach and eliminate tariffs on all U.S. imports, but would that really make a difference?

Under the U.S.-Japan Trade Agreement that entered force in 2020, Japan committed to providing substantial market access for U.S. products by phasing out most tariffs, enacting meaningful tariff reductions or allowing a specified quantity of imports at lower duties. Japan's tariffs on U.S. imports are currently around 3%, while U.S. tariffs on Japanese imports are about 1.5%. Nearly 90% of U.S. food and agricultural products imported into Japan are either duty-free or benefit from preferential tariff access. For example, of the 770,000 metric tons of rice imported annually, some 350,000 metric tons or so come from the U.S. — the largest share from any country — and 100% of it enters Japan duty-free.

Nearly all of this rice is produced in California under the Calrose or Nishiki brands and is the same type of grain that Japanese people typically consume. Other imports mainly consist of long, thin grain varieties used for rice flour and animal feed, which are also distributed as part of Japan's food aid programs.

Due to recent rice supply and price issues in Japan, importing more California rice is an option, but abnormally dry weather has reduced supplies over the past two years.

Tokyo could also speed up the purchase of American-made military equipment, but the supply of key items is limited not by the timelines of Japan’s order, but by the U.S. defense industry's capacity to build such weapons. For example, Japan agreed to buy about $4 billion worth of Tomahawk missiles, and wanted to do so as quickly as possible. To begin delivery this year instead of waiting until 2027, Tokyo had to modify the order, splitting it into 50% of an older version and 50% of the newer version.

The top five imports into Japan by annual monetary value are crude oil (over $80 billion), liquefied natural gas (around $50 billion), followed by coal, integrated circuits and broadcasting radio/TV equipment and telephones.

Japan is eager to buy more LNG from the U.S., the world's largest LNG exporter, which plans to double its supply capacity by 2028. In a meeting earlier this year between Trump and Ishiba, Japan also expressed interest in exploring a joint venture with the U.S. to fund the $44 billion construction of the Alaska gas pipeline project, a priority for Trump. However, with a target completion date of 2031, this project will take years to impact trade balances.

Today, Japan buys about 10% of its LNG from the U.S., its fourth-largest supplier, with Australia leading at 41%, followed by Malaysia at 15.8% and Russia at around 9.7%.

If the nation adjusts its current purchase agreements, how much LNG can the U.S. sell to Japan this year beyond the already contracted amounts? Never mind South Korea and other countries that also want to buy more American LNG to offset their own deficits.

It has always been challenging to eliminate the trade deficit with the U.S., and the most imbalanced sector is the automotive. According to the Hudson Institute, autos and auto parts accounted for 37% of Japan's imports to the U.S. in 2024, totaling $55 billion, yet they made up 78% of the goods deficit with the U.S.

Trump recently suggested that he is open to reducing tariffs if presented with what he calls a "phenomenal deal." The two leaders agreed during a phone call on Monday to appoint a high-level official in charge from each side to keep the engagement going. Ryosei Akazawa, minister in charge of economic and fiscal policy, will spearhead talks for Japan while Secretary of the Treasury Scott Bessent will represent the American side.

The U.S. president is known for favoring bold and counterintuitive ideas. Japan could consider a move along the lines of negotiating for 0% tariffs and offering to purchase $20 billion in LNG. Additionally, Japan might "voluntarily" reduce its auto exports to the U.S. by 50% for a year or two. The goal would be to give Japanese automakers time to expand production in the U.S. Given the current long delivery times for vehicles to Japanese customers, this might not be as disruptive as it seems.