How Japan's Sanae Takaichi Is Navigating Trump, China, And the War in Iran

With the Iran conflict threatening Japan's energy supply, Host and TAG Senior Advisor Mira Rapp-Hooper is joined by TAG Principal David Boling and Vice President Yuka Hayashi to explore how Japanese Prime Minister Sanae Takaichi is navigating the current moment. They review Takaichi's recent summit with U.S. President Donald Trump in the backdrop of his demands that Tokyo assist with the opening of Strait of Hormuz, and how Japan's leadership addressed the issue of overseas deployments. The conversation turns to China's coercive actions vis a vis Japan, bilateral tensions, and Japan's effort to stay firm without escalating. This edition of the podcast also examines the U.S.-Japan trade dynamic, with a focus on tariffs, Section 301 investigation, and the $550 billion investment agreement — as well as Japan's domestic political risk of inflation, a weaker yen, and fiscal policy. 

What Comes Next with Mira Rapp-Hooper is produced by Rivan Dwiastono, executive produced by Lauren Dueck, with editorial input from Prashant Jha. It contains music by Cody Martin via Soundstripe. 

What Comes Next is a production of The Asia Group, and is powered by TAG AI, TAG's geopolitical decision engine for businesses.

Transcript

SPEAKER_01 0:00

There was a report recently saying that the uh Philippines and I believe Vietnam uh went to Japan uh to ask for um a loan of the crude reserve. And that raises a very interesting question because China is ready to help these uh countries during this crisis.

SPEAKER_02 0:20

Japan's somewhat of a split personality with China because they need to maintain a good economic relationship. It's still the number one trading partner. But when it comes to to um national security issues, a lot of concerns.

SPEAKER_00 0:36

With Prime Minister Takeichi just having held, by all accounts, a very successful summit with President Trump, I'm looking forward to unpacking what precisely transpired between the two of them and where Prime Minister Takeichi will take things next. My guest this week couldn't be better positioned to help us answer exactly those questions. David Bowling is a principal at the Asia Group, where he is based in Tokyo and brings over 30 years of experience from senior positions within the US government, nonprofits, and private sectors. Notably, he was a deputy assistant U.S. trade representative for Japan across three presidential administrations. Likewise, Yuga Hayashi is the vice president at the Asia Group and a member of the firm's Japan Practice, where she leverages decades of experience as a journalist in Japan, notably a reporter at the Wall Street Journal for over two decades. I'm really looking forward to hearing their takeaways from this incredibly important summit. Let's dive in. David Bowling, Yuga Hayashi, thanks so much for being here with us on what comes next. It's a great opportunity to talk to you both because, of course, Prime Minister Sinai Takeichi just visited Washington to meet with President Trump uh just a little while ago. By all accounts, despite the fact that this is a very complex geopolitical environment for her to navigate, had quite a successful summit. Now, of course, when the summit was scheduled, Prime Minister Takeichi was just coming off of the back of her historic win in the lower house of the diet, looking to cement her personal relationship with President Trump and to demonstrate Japan's ability to deliver really high-quality investment into strategic sectors that the United States and the Trump administration care about. But of course, over the course of the weeks leading up to the summit, a new major factor was introduced into the picture. And that was, of course, the question of what Japan might be asked to do with respect to the conflict taking place with Iran. In the days and weeks leading up, President Trump increasingly signaled that he might ask the Japanese leader whether Japan might be willing to contribute assets, resources, take risk in the Strait of Hormuz to try to help the United States reopen the strait, uh, given the ensuing energy crisis that is reverberating through the globe as a result of this conflict. This, of course, is a very complicated question for any Japanese leader to take on, given the self-imposed restrictions on use of force and normative prohibitions against large-scale overseas deployment that Japan has generally imposed on itself. So, David, I'd love to turn to you first for a basic question of how Takichi navigated this. How did she pull off such an amicable summit with President Trump in a world in which he is laser focused on the Sarran conflict and she has real limitations back home to what she can commit to this ongoing crisis?

SPEAKER_02 3:39

Thank you, Mira. Great to join you. And I think you framed the issue. Well, I would say that the thing that has always impressed me about the Japanese leaders in dealing with Trump is the pragmatism. And I think, you know, Abe uh sort of set the playbook on that, and then Takaichi has been able to continue it. But, you know, as you said, she approached this summit in a very tight spot given the legal and political constraints on her when it comes to the self-defense forces and then the demands from the Trump administration, and probably heightened expectations. You mentioned that she came in with a much stronger uh political position than she had last October, and that probably raised some expectations in the White House about what Japan ought to be doing. And she was very deft at this. I think that she was able to communicate to the President that, look, this is not a lack of will uh on the part of Japan. It is because of some, you know, real constraints, political or legal. But I think that the thing that still really stands out to me is the skill, uh, the pragmatism of Japanese leaders to be able to work with Trump. Look, it it wasn't necessarily going to be always be this way. He's a very different person from any Japanese that I've ever met, right? I mean, he's blunt, Japanese tend to be indirect, he's brash, they tend to be polite, I mean, he's impatient, they tend to like process. But um, I think it goes, I guess I'd sum it up to saying to the Japanese, we all know the U.S. relationship is the most important, and that pragmatic approach to stay focused on the relationship and sort of put aside the noise, uh, I think was the secret recipe.

SPEAKER_00 5:36

You could tell us a bit about the energy security piece of this. Of course, like many of our other allies and partners in East Asia, Japan is heavily dependent on the Middle East and on the Straits of Hormuz for both its crude and its LNG supplies. So when it comes to the kind of material realities of this conflict, what kind of pressure was Takeichi facing on that front that she continues to have to navigate?

SPEAKER_01 6:02

Um so this is um there is no question that this is a very, very serious um issue for Japan. Japan does get 90% of its oil uh through the Strait of Hormuz. Um that said, uh, Japan has done over the decades a lot of work to uh build buffers against emergencies uh just like this. Uh so for example, uh Japan uh has a crude oil reserve uh worth 250 days of consumption, which is the best among oil importing countries. Um and if you look at natural gas, um it does get some natural gas uh from the Gulf, but it's only 10%. Uh that wasn't the case before. What happened was over the years, Japan really diversified the sources. Now uh the largest supplier is Australia. Uh, next one, I believe, is Malaysia, uh, gets some from Brunei, uh, North America. Uh so in that sense, uh, Japan is very well prepared uh for the situation. Um and other countries are aware of the situation. Uh there was a report recently saying that the uh um Philippines and I believe Vietnam uh went to Japan uh to ask for um a loan of the crude reserve. And that raises a very interesting question because China is ready to help these uh countries during this crisis uh to uh expand its influence. So Japan would like to help them, but at the same time, Japanese people are really concerned about the security of their own supply. So it's just an interesting issue uh that's uh facing the Japanese government right now. Um that said, um Japan does have a lot of vulnerabilities as well. It does have an abundant crude oil reserve, but when it comes to uh petroleum derivatives uh like NAPTA, which is a feedstock for plastics of all kinds, or uh helium, which is critical for the production of uh chips, uh they do not have a whole lot of reserves. So um Japanese businesses are already uh facing uh shortages. So the longer this crisis uh lasts, uh the greater these issues uh will be. So that's the broader um background to this.

SPEAKER_00 8:38

But you point to a really interesting dynamic, Yuka, which is that Japan's uh effective strategic management of its own stockpile puts it in a relatively much better position um than many of its neighbors who are really already quite pressed in this moment. Um, we're seeing the situation in the Philippines spiral quite quickly. And especially in a world uh where Prime Minister Takeiji is really viewed as a very strong leader with the potential to be a regional leader in this moment where the Indo-Pacific is looking for one. It's perhaps not surprising that friends and neighbors are turning to her to see um if she can lend energy support. But as you say, real restrictions on her being able to do so. I want to kind of pull on uh the other elephant uh in the room or dragon, if you will, um, which is the fact that, of course, uh in the lead up to this summit, what folks had been most focused on before the Iran War broke out was the fact that Takeichi was going to see President Trump about 10 days or so before he traveled to Beijing. Of course, President Trump subsequently postponed that summit and has now re-announced that he's planning to be invasion with President Xi Jinping of China in mid-May. But of course, having the ability to explain Japanese perspectives on the competition with China and in particular uh reaccustom President Trump to the fact that the Japanese government has been under incredible pressure from the PRC since Takeichi's comments before the die in November was a really important sequencing. David, I'll turn to you to ask you to help us understand how much Takeichi was able to make use of the summit, do we think, for the purposes of sending those strategic messages on China? And how much did that sort of loss of tight sequencing uh mean that perhaps she wasn't willing or able to go quite as far as she might have hoped in making sure her message landed right before Trump traveled to Beijing?

SPEAKER_02 10:46

Yes. And you know, our colleague uh here at the Asia Group, Chris Johnson, I think he summarized it quite well when he said that, you know, Takaichi's goal was to be the last leader to speak to President Trump before he went to China to make Japan's equities quite clear to him. And she ended up instead being the first leader to visit with him right after the Iranian War, which was the tight spot she was in. So, yes, she did lose that opportunity to be the last person in the room, so to speak, uh, to talk to Trump before he headed to China. We all know uh that uh being the last person in the room is advantageous in this administration. As far as the overall strategy that Takaichi has towards China, you know, I think that as you pointed out, a lot of coercion, economic coercion from China here most recently, given her comments in November about uh Taiwan. But this this playbook has been in place from China since 2010, uh, when the Senkaku Island dust-up occurred and the um the uh export controls on rare earth minerals and all that. And so ch Japan, I think, ever since then, has become much more realistic in its approach to China from a defense standpoint. You know this probably better than I do, Mira. I mean, Japan's somewhat of a split personality with China because they need to maintain a good economic relationship. It's still the number one trading partner, but when it comes to to um national security issues, a lot of concern. The way I like to summarize it is as follows is that that for Japan it's kind of getting tired of being picked on by China. And so how do you push back? Well, you push back uh by um showing that you're gonna spend more money on defense, that and that in essence that Japan's gonna bulk up. It's gonna have a membership to Gold's gym and get stronger. And then the other part of the equation is you tell China, hey, you may be bigger than we are, uh, but we have more friends. And the number one friend, the most important friend of friends is the United States, but you know, increasingly Australia, Philippines, and other countries. And and I think that that Takei is going to continue that approach. The last thing I would say is I do not think she wants to escalate tensions with with China at all. I think she's made that clear. Uh China, Japan doesn't want to go down that route, but Japan wants to be firm towards China.

SPEAKER_00 13:19

And Yuga, anything that you can tell us in particular about how she think about the actual effects of Chinese coercion on Japan at this point in time. As David indicated, you know, Takeichi is clearly threading a very fine needle eye. She wants to stay firm, she wants to stay resolved. She has uh totally um, you know, denied Beijing's request to retract formally her statements before the diet, but she's also not trying to usily. Um and yet at the same time, it can be a little bit difficult to track how Chinese um coercion in particular, uh declared ability to restrict dual use items is actually impacting Japan. What can you tell us about how she's kind of navigating this materially and how she can continue to sort of stay this course of resolve without escalation?

SPEAKER_01 14:14

Um so in the past few weeks, the old attention has been on the Middle East, uh, but the meanwhile, the Japan's relationship with China is not getting any better. I think it's gotten a little bit more tense. Um and I think Takaichi and the Japanese government continue to have very firm attitude toward China and ready to confront it a little bit without provoking it too much. Um, so Japan is getting ready to issue its annual uh foreign policy document. Uh, in it, according to reports, uh Japan is going to describe uh China as an important neighbor. Uh, that is a downgrade from the most important relationship or something like that. Um, that has really upset uh China. That document is not out yet, so there's a lot of attention on that. And one concerning development that we saw recently was um uh an officer from uh Japan's self-defense force uh got into the Chinese embassy in Tokyo with a knife uh hidden somewhere, and that has really flared uh the relationship between the two countries as well. And uh our colleague uh George Chen has said that um China sees Japan as enemy number one. That position used to be uh for the US. Uh so that is the state of the two countries' um uh relationship, and uh it remains very concerning.

SPEAKER_00 15:54

David, I'd love to turn to you uh for a set of issues that is very much in your wheelhouse um as a deep expert on Japan and trade. Um, of course, uh both Takichi's government um and Prime Minister Ishiba's government spent a great deal of time and energy negotiating a trade framework agreement with the Trump administration for the sake of both stabilizing the economic relationship and making sure the security relationship could stay on track. Um, but as in so many other cases, the Supreme Court's decision that AIPA did not constitute a legal basis for many of President Trump's tariffs has meant uh that the Trump administration has now replaced those tariffs uh with temporary tariffs under Section 122 and also announced a 301 investigation into Japan, which is ultimately intended to supersede um those original tariffs. From a process perspective, our Japanese colleagues are not surprised by any of this. Um, you know, they knew that all of this might be in the offing. Um and uh as you say, they care a lot about process. Uh so they've remained very steady because they kind of knew what would come next if all of these eventualities did come to pass. But a 301 investigation um is nonetheless potentially politically dicey. Um, and in this case, um, contain specific language about Japan having overcapacity um that it's intentionally exporting, um, which may not play incredibly well uh with the Japanese public. So talk to us a little bit about how Takeichi is going to handle this 301 investigation in the weeks to come and how she can kind of protect that relationship with President Trump and everything she has been building over the course of the last few months, despite the fact that there's been yet another wrinkle in the trading relationship that the Japanese government has worked so hard to stabilize.

SPEAKER_02 17:52

Yeah. So I think it's important to remember that the real centerpiece right now of US-Japan trade relations is the $550 billion investment agreement. And that's going to determine over the next two to three years how the relationship unfolds. And as long as Japan is able to step up steadily with investments, as it's been doing, I think they'll keep the Trump administration satisfied. And let's not forget, he calls himself, I mean, President Trump calls himself tariff man for a reason. And the goal here is to avoid any new tariffs, especially on Japanese automobile imports. And I think that that Takaichi was successful in that uh goal and reached that goal at the at this meeting, and that things seem to be going in in the right direction. So she has to be very pleased with that. On 301, look, the Japanese uh government officials, they know 301 very well. Uh if you say the numbers 301 to them, I think they normally have an immediate allergic reaction from the 1980s and 1990s when it was used against them on semiconductors. You had Super 301 that was used on um supercomputers, and then you also had it used in the mid-90s by the Clinton administration or threats of it on automobiles. So this is well-known territory. The bad news is they were listed in two petitions uh that have been filed uh by USTR to open investigations. So that's the bad news. They're on the list for these two uh investigations. The good news is they're not the main focus as they were in the 1980s and 1990s. Uh one of the complaints, so to speak, is about structural excess capacity, economic excess capacity. And there are 16 countries listed. They're not in alphabetical order. Uh number one is China, as that ought to be, because it's the poster child for that type of economic behavior. Number 15 is Japan. And so I think that tells us that Japan is really not the main focus. It's the the the issue that's discussed in the petition is um automobiles. Um that's a you know a topic near and dear to to Trump's heart. The other one has to do with the failure to ban or enforce laws uh against imports of um goods made from forced labor. And here, sixty countries are listed. They're all in alphabetical order. Japan is one of them. But here again, I don't think Japan is the main focus. Uh but Japan probably could strengthen its laws against those types of imports, and that will be the focus of that. But I don't think to I don't think Japan should be panicking at all. This has a process it has to go through, but they need to pay attention to it.

SPEAKER_00 20:36

You got tell us a little bit more about the state of affairs with the $550 billion investment agreement. David, I think rightly teed up for us than the notion that it really is going to all come down to this. Um, and of course, there were a number of projects announced during the Takeichi Trump visit that indicate that Japan is moving forward, certainly is moving forward at a much faster clip than any other country. Um, but of course, you know, those of us who are well used to pouring over leader-level fact sheets can tell from the language that many of these projects are very early stage. Um, what is the mandate that Japan is trying to work with here? And how do you think they can be successful in President Trump's eyes? And what opportunities are are these projects presenting for businesses?

SPEAKER_01 21:21

Um, so we have been surprised at how quickly uh Japan and the US uh have uh put together these projects. Uh it is not uh there yet. It's is it's far from the $550 billion that they uh pledged, uh, but they've already lined up uh projects that's worth over $100 billion. And the types of projects that have been unveiled are interesting in that uh almost all are in the energy field. Uh and um these projects are not necessarily um. Or Japan itself, it's all about producing more energy for the US market where demand is surging to cover the AI-related demand. Why is Japan um supplying funding for these projects? I think one reason for that is by helping the US increase domestic energy supply, Japan is hoping that it can get some of the natural gas that's available for exports from the US that Japan can purchase to increase its uh own energy security. And that aspect really has been uh brought to focus uh during the DD's crisis. Uh that said, um there's a lot of skepticism uh among the Japanese public and Japanese businesses about whether these projects would really benefit uh Japan. And the Japanese government uh has a lot to uh explain. So um, yes, we uh still have a lot of things to uh uh to uh follow closely.

SPEAKER_00 23:13

On that score, you guys, I'd love to stay with you for just a moment and to zoom out on the question um of the broader economic environment and incentives that Prime Minister Takeichi is facing. Obviously, she is well aware of the importance of the economic relationship with the United States, and that's the point of this investment agreement. But over the course of her early time in office and of her candidacy, um, I think there's been no question that she was elected with a mandate to revive Japan's economy. Um, right, after the perception that in in particular the LDP was not doing enough over the course of many years to really reinject dynamism into Japan's economy with a number of metrics across the board that were really beginning to weigh on voters, um, whether it was lagging wages or in some cases concerns about uh certain taxes. Prime Minister Takeichi um has now made very clear that she wants to engage in expansionary fiscal spending and target strategic industries that she thinks hold real promise in Japan. But she's under a fair bit of political pressure as well to pursue certain uh policy levers, such as a pause in the consumption tasks that had been favored by some of the populist parties in Japan's last two elections, which of course would then constrain revenue that the Japanese government is taking in at a time when it wants to spend more. So talk to us a little bit about the fiscal picture Takichi is facing. And given the fact that she has kind of self-styled as a little bit of a fiscal firebrand, someone who's willing to try things that are fundamentally different than what LDP members may have been willing to do in the past, how she's going to navigate this picture now that she's back from this very successful summit.

SPEAKER_01 25:08

Um yeah, thank you for the question. Um, so um it has been very interesting to watch the financial market's um response, reactions uh to Takaichi's economic policy. Um, if you look at the stock market, uh it really liked what she was doing. Um, well, now because of the Gulf crisis, the stock markets are down. Um but every time Takaichi announces uh spending policy, the stock market shoots up. But at the same time, there the the reaction of the bond market has been uh hugely negative since she came in. There are a lot of concerns among bond investors about her aggressive spending. So there are these two factors uh that are like really um affecting her policy. Um then we have this crisis, and the focus now uh is inflation, well, energy prices and inflation. Um, this is going to um really accelerate the inflation in Japan. And that, of course, is a huge issue in Japan as well as in the US and other countries. But in Japan, people are so used to uh watching prices stay stable or decline for so many years, for like two decades or even more. So inflation is uh really a new thing for Japanese people, and wages are not really going up. So it's a very serious uh issue uh in Japan. Um, against this background, it uh in a sense makes it easy for Takaichi to pursue her aggressive uh fiscal policy because prices are uh going up so much, it it makes it easier for her to lower uh the consumption tax. Uh there will be uh little pushback against that. Uh she's also already started um giving out subsidies to uh suppress the increase in energy prices. Uh so in the shorter term, um, I think the current situation uh is uh very positive for uh Prime Minister Takaichi. Um but if you look at the longer term, this this concern about physical health is going to come back. And because of the extra spending that is expected as a result of the current situation, uh the longer-term issues uh could be bigger. Um that is that is basically the uh picture that I see.

SPEAKER_00 27:50

Incredibly well put. David, anything you would add to the picture that Yugo just laid out and in particular how businesses should be thinking about this environment?

SPEAKER_02 27:58

I think that inflation, though, is very dangerous for Takaichi. And it is by far the top concern that you see expressed in any polling. And she's spending more, more fiscal spending on defense, more fiscal spending on certain sectors. Uh she wants to do this, as uh you can mention also more spending now to counteract the high gasoline prices. If you talk to economists, they will say that that makes inflation go up. And they'll also tell you if you cut taxes, uh she cut a tax on a provisional gasoline tax at the at the end of last year, and then she wants to cut taxes on consumption, the consumption tax. Economists will tell you that's going to increase inflation. And you can mention we have the oil crisis now, the impact on energy uh markets in Japan, and Japan depends on all, you know, imports almost all of its energy, and the only other the other thing that I would mention too is the weekend. And the weekend is really dangerous for her, I think, because it uh it will i uh it will even increase more so the cost of energy imports and food imports. So she has to watch inflation. Inflation is an incumbent killer, as I say. Uh President Biden knows this. Uh Prime Minister Yeshiba knows this. I think he lost the upper house uh last largely because of the uh because of inflation. So I think that has to be her top concern. And I'm not convinced that the policies that she's pursuing right now, in the long term, as Yuka said, are going to address inflation, and that could be uh you know a political risk for her.

SPEAKER_00 29:42

All incredibly uh important watch points and excellent color for understanding this next phase of what has thus far been a very exciting tenure for Prime Minister Takeichi in Japan. David Bowling, Yuka Hayashi, it's been wonderful speaking with you today. Thanks so much. As I reflect on my conversation with David and Yuka, I am impressed, of course, uh, by the fundamental pragmatism of Prime Minister Takeichi and Japan's leaders as a whole in navigating this incredibly challenging moment. Nevertheless, it's quite clear that the fiscal and other pressures that Prime Minister Takeichi is under is real. And so it seems to me that she's going to need to bring that very same pragmatism to her own domestic economic policy in the months and years ahead. Today's episode was produced by Rifan Dewey Astono, executive produced by Lauren Dewick, with editorial input from Prashant's job. It contains music by Cody Martin via Soundstrike. What comes next is a production of the Asia Group and is powered by Tag AI, Tag's geopolitical decision engine for business. We'll see you on the next episode.