Trump World: Nice Guys Come Last, so Show Your Cards

When President Donald Trump unveiled his "reciprocal" tariffs in early April, he also invited foreign countries to offer deals that would offset the tariff damage. Japan was the first country to enter negotiations. So, there was an expectation that, being America's most important security ally in the key Indo-Pacific region, it would be treated with kid gloves and a deal would be reached fairly quickly.

So far, though, little progress has been made, and "no deal" remains a real possibility. On the other hand, America's number one foe, China, was able to negotiate a significant reduction in United States tariffs in a matter of days. The reason: China has a near-monopoly on the mining and smelting of the rare earths crucial for high-tech industrial processes.

The details of the China-US agreement are scarce. However, it remains the case that China can cut off the supply at any time it chooses. In the Machiavellian world of great power rivalries, Xi Jinping holds a high denomination card. He doesn't need to use it. Just brandishing it from time to time makes the point.

*United States Federal Reserve in Washington, DC (©Wikimedia Commons)*

Japan's Invaluable Card

Japan has a high-denomination card, too, but far from brandishing it, Tokyo pretends it doesn't exist. That is the $1 trillion USD of US bonds held by Japanese entities, by far the largest foreign ownership. The Trump administration is highly sensitive to action in the US bond market. Hence, the constant attacks on Federal Reserve Chairman Jerome Powell.

Concerns about the level of American government debt long predate the current administration. However, Trump has consciously taken a significant risk in piling up tax breaks and spending commitments in his recent "big beautiful bill." (The one described by Elon Musk as a "disgusting abomination.") A bond market rebellion leading to higher interest rates could sink his presidency, as he must know.

Before the negotiations got going, Finance Minister Katsunobu Kato made an off-the-cuff comment on Japanese TV about US bonds being a possible "card" that Japan could play. The very next day, he walked back his words, stating that Japan would never do such a thing. Presumably, he was "got at" by his officials who, naively, assumed that being cooperative would earn rewards.

The episode was reminiscent of the fate of Prime Minister Ryutaro Hashimoto, one of Japan's bolder leaders. In the late 'nineties, he suggested that Japan should sell its already considerable holdings of US treasury bonds and buy gold instead.

The result was a mini-tempest in global markets and a hasty denial by Hashimoto. Instead, the man who had the foresight to kickstart Japan's Big Bang in financial services was suckered again. His officials persuaded him to raise the consumption tax in the midst of a severe banking crisis, thus ending his premiership and, effectively, his political career. To his dying day, he bitterly regretted having accepted the advice of his officials.

Courage to Overturn Conventional Wisdom

The message back then was that Japan should remain a tributary possession of the United States. Taxes on consumption were steadily increased. That continued, even under the premiership of Shinzo Abe, who did so much to overturn conventional wisdom in other areas.

*Japanese Finance Minister Katsunobu Kato (right) shakes hands with US Treasury Secretary Scott Bessent on April 24, 2025. (©Japan Ministry of Finance).*

Japan is the world's largest creditor nation. Yet, there was a constant doom-mongering chorus from the rating agencies and establishment economists. They moaned about the risks of Japan's internal debt ー which was owed by one set of Japanese to another set of Japanese.

Japan has continued to run current account surpluses decade after decade. That has helped to enable American overconsumption through Japanese over-saving. No doubt, it seemed a safe and simple strategy. But the second coming of Donald Trump raises all sorts of new possibilities.

Currency regimes have undergone two controlled upheavals in the last 55 years. First was President Nixon's scrapping of the gold standard in 1970. The second was the Plaza Accord to drive down the value of the US dollar against the yen and the West German mark in 1985. Interestingly, in real terms (taking account of accumulated inflation), the dollar is roughly as high as it was pre-Plaza, and the yen at the same level as it was in 1971.

Timing is Everything

Are we about to experience a similar upheaval, designed to devalue the dollar? If so, it would be unlikely to be the result of a "G7" type powwow. Today's world is too chaotic for that. More likely, it would be a genuine shock, like the end of the gold standard.

Already, some disturbing ideas have been floated. The proposal to coerce American allies into buying 100-year bonds at much below market interest rates is one example. Stephan Miran, Chair of the Council of Economic Advisors in the Trump administration, dreamed up that one.

If inflation picked up, there could well be pressure on the Fed to keep interest rates below the level of consumer prices. As has been the case in Japan, the result would be a super-weak currency.

In any of these scenarios, selling US government bonds would be a smart move. And in the current situation, nothing can be ruled out. At the very least, Japan needs to maximize its leverage by brandishing its cards and showing that it is not afraid to use them.

Author: Peter Tasker

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