Red Sun, Rising Doubts
- Various Contributors
- Apr 16
- 19 min read
Updated: Apr 18
A Tale of Japan’s Political, Economic and Security Crises
Written by Keito Bortesi and Giulio Cesare Graziani
In Japanese tradition, the practice of kintsugi involves repairing broken pottery by gluing shards back together (“tsugi”, 継ぎ) using a mixture of resin and powdered gold (“kin”, 金). Today, despite a reputation for cautious incrementalism, Japan's economic and political order is showing cracks that hint at profound transformations underway. Japan now finds itself at an inflection point—one that could redefine its trajectory for years to come—yet its future hinges on more than just domestic debate. The question now is not whether Japan can prevent cracks from forming, but whether they can gather enough “kin” to keep it all from falling apart.
Economic Policy at a Crossroads
Possibly the most debated policy in Japan’s recent history has been the commitment to an unconventionally cautious interest rate target by the Bank of Japan (BoJ)—and the past months show little change in its disposition. Last October, despite a depreciating yen, the BoJ stuck with an interest rate of 0.25%, the same it had been since July. This January, the BoJ raised interest rates to a mere 0.5%. While these numbers may seem “stubbornly” low, they are still the highest since 2008; in fact, interest rates had remained negative for the last eight years.
With gradual interest hikes planned in the coming years, the BoJ is presenting a more flexible attitude. However, certain geopolitical concerns may keep it chained to its old wariness—particularly the yen’s continued depreciation, the uncertainties surrounding the Trump administration, and the consequent “threat” that relying on foreign direct investment poses for Japan’s economic security and independence.
Before October’s snap election—and certainly during Abe’s reign—the BoJ’s expansionary monetary policies were often balanced out by contractionary fiscal policies, frequently enacted as part of “Abenomics”. With PM Shigeru Ishiba now leading a newly formed minority government, several implications arise. For one, the fiscal policy scheme for Ishiba’s term remains unclear. Ishiba has announced he would not revise the 2013 accord with the BoJ “aimed at ending deflation and putting the economy on a sustainable growth track”, yet a minority government encompassing various factions may still adopt policies that misalign or contain compromises clashing with the overarching strategy. For similar reasons, this minority government may face potential delays in passing legislation. There is serious uncertainty about how quickly policymakers from opposing parties can coordinate their votes to respond to economic crises, reducing the effectiveness of fiscal policy during times that call for swift government action.
Foreign Ties and Foreign Threats
On April 2, 2025, President Trump announced a series of “reciprocal tariffs”—or, at least, his interpretation of what reciprocal action entails. The administration’s calculations claim that Japan currently imposes a 46% “adjusted” tariff on American goods, to which the U.S. will respond with a 24% tariff on all imported Japanese goods. And like lemon on a fresh wound, the White House has confirmed a 25% tariff on automotive imports from any country, a move that is especially hurtful for Japan’s signature industry. Automotive shipments account for almost 40% of Japan’s total exports to the U.S.—which also represents about one-third of the vehicles the country exports globally—highlighting a dangerous reliance on a source of revenue that is now significantly diminished.
As such, some irony lies in Trump’s “America First” perspective. The three biggest American auto manufacturers—General Motors, Ford, and Chrysler—referred to as the “Detroit Three” have turned to producing vehicles for more affluent individuals. In 2024, the top fifth of American households accounted for 55% of new vehicle expenditure, much higher than the 40% in 2020. With tariffs also deterring U.S. consumers from purchasing new cars, there is a growing incentive to purchase second-hand, which can hardly lead American auto companies to prosperity.
However, even before these tariffs, Japan’s exports had become less competitive over time. The yen’s 27% depreciation from 2018 to 2024 did not result in what many economists had believed—and hoped—would be a silver lining: an increased trade surplus driven by the yen’s relative cheapness overseas. Instead, Japan’s import prices rose even higher than domestic and export prices, meaning that the trade deficit in nominal terms actually grew.
According to the Daiwa Institute of Research, it is estimated that Trump’s retaliations would reduce Japan’s real GDP by 0.6% this year and 2.9% by 2029—1.8% of which are a direct result of Trump’s tariffs on Japan. The other 1.1% are indirect effects from tariffs on China and other East Asian countries. Indeed, much of what China exports to the U.S. utilizes raw materials imported from Japan. Any tariff on the former is essentially a tariff on the latter, highlighting the Achilles’ heel of globalization.
In a crucial move on April 8, Japan became the first major economy to secure tariff negotiations with Trump. Whether this can lead to better conditions for Japan remains to be seen. In part, this depends on Trump’s ability to view the tariff as mutually unfavorable, particularly understanding Japan’s position as the biggest foreign investor in the U.S. .
Turning to financial markets, Japan could nonetheless benefit from its American counterpart’s domestic situation. While tariffs would usually cause a currency appreciation due to a reduced trade deficit, Trump’s drastic measures imply otherwise. For one, with tariffs on roughly 90 countries, American consumers and firms will surely experience high inflation. Not to mention, a pre- ”Liberation Day” IDE report projected that by 2027 Trump’s tariffs would reduce global GDP by 0.6% yet reduce U.S. GDP by a whopping 2.7%. Higher domestic inflation combined with inklings of a recession are sure to prompt a stark drop in U.S. interest rates.
At a time of unprecedented currency devaluation, such a drop in U.S. interest rates may prove beneficial for Japan. There is a clearly observable correlation between the yen’s short-term value in the forex market and the gap between the two countries’ interest rates on long-term bonds; when the difference between the two is smaller, the yen tends to grow stronger and appreciate against the dollar. This dynamic is readily noticeable, as the dollar has since depreciated from approximately 150 to 146 yen.
However, as seen in the graph below, the two usually correlated trends have been diverging since mid-February, likely signaling an exogenous shift in the value of the yen caused by current geopolitical uncertainty. Nonetheless, a weaker and precarious U.S. dollar might still favor the yen through another channel—namely, the investors’ retreat to steadier currencies such as the Japanese yen, even if the latter’s safe-haven status has been gradually undermined.
Looking to the near future, Japan’s relationship with foreign direct investment (FDI) is sure to evolve. The country’s contemporary landscape of cross-border corporate acquisitions presents two relevant cases: Nippon Steel’s (NS) planned buyout of U.S. Steel, and Canadian retail conglomerate Alimentation Couche-Tard’s bid for Japan’s Seven & i Holdings. Neither proposal has gone through yet, and their potential developments may not only concern economic aspects but also national security.
During a Washington summit on February 7, Trump and Ishiba discussed various topics, one of which was Nippon Steel’s proposal of a 100% buyout of U.S. Steel. This acquisition was initially proposed as a 55-dollar-per-share purchase, at a total of 15 billion dollars. Trump spoke of how Nippon Steel “is going to be doing something very exciting”. However, he then claimed that “they’ve agreed to invest heavily in US Steel as opposed to [owning] it”. Instead of correcting Trump, PM Ishiba echoed the statement, parroting “as Mr. President says, it is not acquisition, it is investment”, signaling the end of the initial buyout idea.
There may be several reasons for Ishiba’s submission to Trump. For one, Ishiba’s party, the LDP, is facing upper house elections this summer. Arguing with Trump during a public summit may paint Ishiba in a negative light, especially if things were to escalate—as seen with Ukrainian President Zelensky’s recent summit. Ishiba reinforced his motives for such pacificity when he stated, speaking to reporters upon his return, “If I had immediately rejected that… the negotiation would have just fallen apart, so I decided not to do so.”
It is also worth noting that Nippon Steel’s 100% buyout of U.S. Steel can be viewed as a threat to American national security. When we consider Trump’s many blue-collar voters in Midwest industrial states, it is clear that a culture war is at play. Considering Trump is the face of American nationalism, reversing himself from stoic opposition to subdued acceptance on the NS buyout would cause him to lose a great amount of credibility and support.
As such, from Nippon Steel’s perspective, the prospect of a 100% buyout is almost impossible, and the prospect of a majority share the absolute best case scenario. Then again, a 75% buyout is surely not worth the initially proposed 55 dollars per share, necessitating some amendments so as to avoid any violations with the existing contract. The only strategy going forward for NS would be to make additional concessions, framing them as simple triumphs by Mr. Art-of-the-Deal Trump to protect the United States of America.
Lest we forget that Japan—an island nation—is geographically prone to depend on external resources. Such dependence creates economic uncertainty, and such uncertainty breeds fear. Nowhere else is this fear more apparent than in Japan’s newly revised investment review mechanisms.
On August 19, this fear was on national display; the large—and beloved—Japanese retailer Seven & i Holdings, known for its signature convenience stores spread throughout the country, announced a buyout proposal they had received from Alimentation Couche-Tard (ACT), a multinational Canadian retail chain. To illustrate the impact, it must be noted that ACT’s acquisition would create the “largest convenience store operator in the world”. However, the following month, in September, Japan’s Ministry of Finance categorized Seven & i Holdings as a business operating in a “core sector” under the Foreign Exchange and Foreign Trade Act. This means that foreign acquirers, such as ACT, must submit prior notification and undergo national security screening, creating a delay or possible termination of the deal. Indeed, consisting of vague criteria, the screening process only works on a disorganized case by case basis, deterring foreign investors. Furthermore, unlike the European Union and United States, Japan’s screening process lacks post-investment monitoring, rendering it even ineffective to an extent and thus doing little for economic security.
Since last August’s announcement, there have been some small developments. In November, the founding family of Seven & i Holdings, the Ito family, announced a 58 billion dollar buyout proposal, far greater than ACT’s 47 billion dollar bid. Ideally, this would have driven the Canadian threat out, ensuring the Japanese company remains in Japanese hands. Alas, in February, Seven & i Holdings disclosed that the Ito family “are no longer able to secure the necessary financing to make a formal proposal to acquire the company”. With this domestic failure, ACT’s external pressure began to mount.
Amidst this, in March, Seven & i Holdings publicly announced that their new chief executive would be Stephen Dacus, the first foreign boss in the company’s history. Strategically, this may give Seven & i Holdings leverage in strengthening Japan-U.S. ties, eventually alienating ACT from the discussion. Strict antitrust laws may also interrupt the operation of 7-Eleven chains in the U.S., rendering ACT’s acquisition a risky gamble regardless.
With Nippon Steel’s stagnant buyout proposal of U.S. Steel, as well as Seven & i Holdings’ resistance against the Canadian ACT, it is clear that the balance between domestic and foreign powers in the Japanese corporate world is at a key turning point.
Times of Transition
The persistent stagnation of the Japanese economy is part of what fueled a growing popular demand for reform, prompting Liberal Democratic Party’s elites (LDP) to seek a fresh mandate from the electorate through early elections. In particular, Ishiba’s bet to garner legitimacy comes in the wake of former PM Fumio Kishida's record-low months of popular support, marking the most significant unpopularity rate for an LDP leader since the establishment of the “1955 system”.
Clearly, such a drastic fall does not happen overnight; many factors have contributed to eroding the hold of what has been Japan’s ruling party for the better part of the last 70 years. Most notably in 2022, after the assassination of former PM Shinzo Abe, the LDP’s long-standing relationship with the Unification Church was brought to both domestic and international attention.
While this was controversial enough on its own, two key factors deepened this wound; for one, the intersection between religion and policy-making is viewed as a sensitive topic by the Japanese public, and so by voters too. In fact, multiple news outlets neglected to report the full picture, intentionally omitting the religious aspect of the assassin’s motives by using more ambiguous terms. Secondly, the LDP’s strategy for dealing with the controversy was lackluster and otherwise performative, only resulting in further public frustration. Many party members—such as the former Deputy Minister Tomohiro Yamamoto—were reluctant to respond to the media's inquiries, leading to a widespread distrust that cost them their seats in the last election.
Whilst Kishida publicly urged politicians to explain their ties with the Unification Church, no plans of an internal investigation were announced. The LDP generally failed to articulate a proper response to the scandal, offering virtue signaling rather than concrete actions. To worsen matters with Kishida specifically, his popularity took a nosedive when it was revealed in late 2023 that over 600 million yen of the LDP’s campaign funds went “unreported”.
A New Political Landscape: Winners and Losers
Ishiba’s choice of calling an early election right after taking on as prime minister resulted in a watershed: the LDP-Komeito coalition fell thirteen seats short of an absolute majority in the lower house of the Diet, marking the second occurrence of such an underperformance since the reform of 1994, when the new electoral system was established.
The largest absolute gains were made by the main opposition party—the Constitutional Democratic Party (CDP)—whose electoral success was nevertheless nuanced. It secured fifty more seats in the lower house and reached a total of 148, which solidified its position as the leading alternative to the LDP in the Diet. However, the party's triumph was more strategic than transformative. While the CDP's gross vote total remained largely unchanged from 2021, its success mainly capitalized on the tepid performance of Ishin no Kai and on the decline of the Japanese Communist Party.
Ishin no Kai, under Nobuyuki Baba’s leadership, emerged from the election with mixed fortunes. While the party managed to preserve Osaka as its traditional stronghold, its overall performance was disappointing. Ishin lost six seats and saw its vote total decline by nearly three million votes compared to 2021, significantly undermining Baba's ambitious vision of positioning the party as a national political force capable of challenging the CDP's dominance among oppositions.
The clearest strategic winner of the race, however, is Yuichiro Tamaki’s Democratic Party For the People (DPFP), which managed to position itself as the fourth largest party in the Diet by increasing its total votes by over 220% from the previous general election. While the party ruled out formally joining the governing coalition, Tamaki signaled his willingness to collaborate with the LDP and Komeito provided that government policies align with the DPFP's interests, thereby carving out some sort of veto power for his own group.
Fighting against Uncertainty
The new political landscape emerging in the Diet out of this election inevitably poses concerns for the future of the ambitious commitments made by former PM Fumio Kishida’s administration toward revitalizing Japan’s security posture as well as its defense industry.
Notwithstanding current PM Shigeru Ishiba’s obsession with defense policy, the pivotal results of October’s vote as well as Japan’s dire economic situation—which the world is now becoming increasingly aware of—casts a shadow over the prospects for Kishida’s legacy.
On the eve of 2023, the cabinet of former PM Kishida approved and published three new strategic documents redefining Japan's security policy and planning to nearly double defense spending. With an ambitious goal of reaching an unprecedented post-war 2% military burden peak (as share of GDP) by the end of 2027, the total expenditure would amount to 43.5 trillion yen dedicated to the "fundamental reinforcement of defense capabilities and complementary initiatives”. The continued effort toward this target is reflected in a FY2025 defense budget of a 8.7 trillion yen total, allocated to a plethora of chapters ranging from weapon supply of adequate quantities and types to multi-domain integration and the development of unmanned vehicles.
Increasing defense spending as outlined by the country’s five-year Defense Capability Buildup Program represents indeed a major departure from the traditional Japanese approach to national security, characterized by the need to circumvent Article 9’s constitutional restraints on the use of force and the maintenance of “land, sea, and air forces, as well as other war potential”.
Over time, and especially since the days of former PM Shinzo Abe’s administration, governmental elites as well as the general population have become increasingly accustomed to the idea that the constitutional article at issue should be subject to revision or at least to a comprehensive reinterpretation. This extends beyond the desire to “normalize” the country vis-à-vis its strategic allies and the international community; in fact, a decisive role is played by the ever more threatening spiral of fear engulfing the Indo-Pacific. Indeed, Japan is not only a neighbor to three nuclear powers manifesting clear militaristic tendencies—China, Russia, and North Korea—but it also finds itself in a region where like-minded countries face escalating security risks that may drag Japan into the eye of the storm, amid the growing tensions in the South China Sea and renewed uncertainties following the unexpected coup attempt in Seoul last December.
The government in Beijing, in particular, is increasingly a cause of concern both for Japanese elites and for the general public. In August, a Chinese military aircraft violated Japan's airspace near the Danjo Islands, crossing a historic red line that heightens the risk perception beyond what the country has previously experienced, especially given the frequent incursions into its territorial waters by Chinese vessels.
At the same time, Japan faces provocations from North Korea, including the ongoing threat of missiles flying over Japanese skies, continued refusal to negotiate on the return of abducted Japanese nationals, and joint military exercises with Russia, further compounding the security concerns in the region.
What the results of October’s election entail in relation to the country’s security endeavor does not only involve a potential stronger opposition to constitutional amendment, but mainly poses concerns over the relevant fiscal debate, intentionally postponed by Kishida to the post-election period. In fact, even if finding ways of financing the plan was already contentious from the start, the surprising devaluation of the yen in recent months brought the nominal value of the currency in terms of US dollars down by about 38.8% of the one assumed by the administration (a five-year average of 108 JPY/USD) when calculating the 43.5 trillion yen figure more than two years ago. A weaker yen inevitably means that much of the expenditure will underperform investment expectations—as imports are priced in foreign currency—unless the government compensates for the portion of the real budget that was lost, which is in the order of billions.
This last step is not straightforward, as Japan’s massive debt-to-GDP ratio—the largest in the world—means scrupulous attention must be given to deficit spending. Even though PM Shigeru Ishiba now surprisingly manifests support toward fiscal stimuli, the cost of debt already weighs heavily on public finances and its payment will become increasingly burdensome after the BoJ’s recent streak of interest rates’ hikes.
Fiscal Governance on a Tightrope
With limited room for budget cuts, however, the only alternative to funding the defense overhaul through deficits would be to rely on increased tax revenues. The problem is that, following the last legislative elections, Ishiba runs a minority government that requires constant negotiation with the oppositions. This makes the fiscal constraint harder to overcome, as all three parties that gained substantial power in the new Diet (as well as some LDP members) opposed the introduction of new taxes previously discussed under Kishida’s administration, such as the tobacco tax.
On top of it, Ishiba’s first post-election major policy announcement involved a large fiscal stimulus package including a number of subsidies to industrial sectors and households with the aim of curbing the effects of inflation on both production and on the cost of living. This politically calculated maneuver reflects Ishiba's acute awareness that continued inflationary pressures could further erode the LDP's already weakened electoral position ahead of the July upper house elections, particularly as Japanese voters increasingly attribute their economic hardships to the incumbent government's perceived policy failures rather than to external global economic factors.
In particular, the ruling coalition included a rise of the income tax threshold in the new budget, a measure whose significance extends well beyond its substantial fiscal implications. The estimated reduction in tax revenue represents not merely a major budgetary adjustment but, more critically, signals the unprecedented influence exerted by emerging opposition forces. In fact, this threshold modification has been a flagship policy proposal of the DPFP, highlighting the hold this party now has on the governing coalition. The assertive policy influence of opposition parties extends considerably further, with mounting pressure from both the DPFP and Ishin no Kai compelling the administration to consider—though not yet implement—additional measures to address the inflationary impacts on household finances, encompassing reductions to the consumption tax rate and the reinstatement of a trigger-clause suspension of half the gasoline tax when fuel prices exceed predetermined thresholds.
The now more fragmented Diet has also forced Ishiba into extensive negotiations throughout the past four months with the explicit objective of securing passage of the FY2025 government budget prior to its commencement on April 1—a constitutional deadline that carries significant administrative and political implications. In search of a majority among its rivals, the government had to cater to the DPFP and to Ishin no Kai, as the CDP opted for a hardline opposition run this time. While the DPFP initially seemed a likely partner for cooperation after Ishiba announced the increase in the income tax threshold from 1.03 to 1.23 million yen, the party never reached an agreement with the LDP, finding the new figure insufficient and deciding to stick to its original threshold proposal of 1.78 million yen.
Its place was taken by Ishin no Kai instead, with the party leveraging its decisive position to push on the allocation of 110 billion yen toward making high school education free without exceptions. While the party's co-leader Seiji Maehara made it clear that they had no intention of becoming a formal ally of the LDP, the two forces reached an agreement on February 21 securing Ishin no Kai's support for the budget bill. This dynamic eventually left the DPFP sidelined in budget talks, as its refusal to compromise on the tax threshold deprived it of a similar negotiating foothold. Meanwhile, the CDP’s uncompromising stance effectively excluded it from the deal making process, further cementing its position as the government’s primary adversarial force.
Miraculously, the Ishiba-led ruling coalition successfully secured passage of the contentious budget bill precisely on March 31—an eleventh-hour achievement that also marks the first time in 29 years that an initial budget request submitted by the government has been modified in the Diet, on top of being the first one to be modified by both legislative houses in the history of post-war Japan. Despite this unexpected parliamentary feat, which defied dire predictions of procedural collapse amid persistent legislative gridlock, the prime minister's position remains precarious. Unfortunately for Ishiba, in fact, his tenure is now at serious risk due to plunging approval rates among voters compounded by right-wing pressure within the party—looming like a sword of Damocles over the prime minister's head.
This pressure is especially acute as Japanese politics shifts into campaign mode ahead of July’s upper house elections, in which the LDP cannot afford to perform worse than in October. A clear illustration of this was provided by Ishiba’s decision to shelve the proposed increase in out-of-pocket caps for high-cost medical care—under pressure from both opposition parties and factions within the LDP. Notably, this move slowed the passage of an already struggling budget bill through the Diet by necessitating another revision in the upper house. More than a policy shift, it was a clear sign of Ishiba having to deal with the razor-thin margin for error he can afford in order to stay in power, with polling data suggesting his grip on the party itself remains precarious. Compounding this is the increasingly vocal stance of the CDP, the DPFP, and Ishin no Kai, along with dissenting factions within the LDP itself, in questioning the prime minister’s legitimacy to govern. They are demanding greater clarity regarding an ongoing scandal over Ishiba’s distribution of 1.5 million yen worth of gift vouchers among 15 rookie LDP lawmakers in early March. At least, this last-gasp legislative accomplishment may shield Ishiba from the immediate threat of an internal rebellion orchestrated by the right wing of the party. In fact, if they were to carry it out, now would be their last possible chance, as the risk of internal turmoil outweighing the benefits of a leadership change keeps increasing with the Tokyo metropolitan assembly elections and the upper house elections in view.
With Japan trapped in a spending spree, legislative gridlock, political insecurity and an economy unable to get back on its feet, the prospects for the country’s ability to take on a greater role within the Indo-Pacific security framework appear quite tenuous. Moreover, current developments on the opposite side of the ocean have left any discussion of U.S. foreign policy in a state of alarming uncertainty, with President Donald Trump’s ambiguous intentions casting a cloud over the future. The planned enhancement of the bilateral command-and-control architecture—upgrading the current U.S. Forces Japan in Tokyo to a joint-forces command intended to serve as a direct counterpart to Japan's newly established Joint Operations Command—faces significant implementation challenges. Recent Pentagon budget constraints potentially jeopardize this critical structural reform, perpetuating the geographical and operational disconnect that necessitates continued communication with INDOPACOM headquarters in Hawaii. Dealing with its crucial—yet increasingly unpredictable—military ally, while also seeking to strengthen strategic ties with seemingly indifferent ASEAN fellow members, will undoubtedly pose a significant challenge for Japan’s administration, requiring deft diplomacy and foresight to withstand these trying times.
Japan’s societal, political, and economic fabric is starting to resemble fractured pottery. Brittle to the touch, its pieces are bound to crumble if dealt with in an uncoordinated manner. Japan's policymakers must approach these fragments not as irreparable damage but as an opportunity for transformation, binding together solutions to the nation's economic vulnerabilities, security challenges, and political fragmentation. Just as the kintsugi master values each fragment while envisioning the reconstituted whole, Japan's leadership must balance immediate tactical responses with long-term strategic reconstruction. Yet the question remains: does Japan even possess the reserves of (metaphorical) gold this political kintsugi requires?
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