April 2025 Urgent Monthly:
The impact of Trump's reciprocal tariffs is a great opportunity for Japan to recover!
Monday, April 7,2025
The impact of Trump's reciprocal tariffs
As you know, US President Trump has already announced on April 2 that he will impose reciprocal tariffs on trading partners around the world. For example, the president stated that he will impose a minimum 10% tariff on all exporting countries to the US, and apply even higher tariffs to about 60 countries and regions with large trade surpluses with the US.
The tariff rates are 34% for China, 20% for the European Union (EU), 24% for Japan, 46% for Vietnam, etc. In addition, the rates are 25% for South Korea, 26% for India, 49% for Cambodia, and 32% for Taiwan. In the case of China, the tariff rate will reach 54% in total, including the 20% tariff previously imposed on the inflow of the synthetic drug fentanyl into the US.
"For too long, hardworking Americans have had to stand by and watch as other countries gained wealth and power, often at America's expense. But now it's our turn to prosper," Trump said at an event in the White House Rose Garden.
The minimum 10% tariffs will take effect at 12:01 a.m. Eastern Time on the 5th (1:01 p.m. Japan time on the same day), and the higher tariffs will take effect at 12:01 a.m. Eastern Time on the 9th (1:01 p.m. Japan time on the same day).
China has already imposed additional tariffs on some imports from the United States, and the tit-for-tat exchange between the world's first and second largest economies over tariffs has become even more intense.
Stock prices around the world have plummeted on the view that negotiations are unlikely to result in the reduction or repeal of tariffs, and concerns are growing about the serious impact that intensifying trade frictions will have on the global economy.
In particular, the U.S. market continued to fall sharply last weekend on
the 4th. The Dow Jones Industrial Average closed at $38,314.86, down $2,231.07
from the previous day, and the Nasdaq closed at $15,587.79, down 962.82 points.
On the 4th, U.S. President Trump posted, "Now is the perfect time for Fed Chairman Powell to lower interest rates. The chairman is always 'late,' but now he can overturn that image and act quickly." However, in a subsequent speech, Fed Chairman Powell warned of the possibility of inflation due to tariffs, but also indicated his intention not to rush to lower interest rates, which led to a significant further drop. In any case, the Nikkei 225 futures at the Osaka Exchange Night Session closed at 32,220 yen, down 1,540 yen from the close of the day.
Thus, the Nikkei average stock price fell by more than 2,900 yen in the
morning session on April 7th, the start of the week, falling below 30,000 yen
for the first time in a year and a half, according to a Nikkei web article.
In the first place, the background to the birth of Trump 1.0 in 2017 was the strong dollar, which was the flip side of the sharp depreciation of the yen and the euro, which was caused by the expansion of quantitative easing (QE) by Japan and Europe (see my book "Trumponomics Causes a Fire: The Consequences of the Global Financial and Trade Wars" (Tokuma Shoten, 2017)).
At that time, anxiety and dissatisfaction over bankruptcies and unemployment arose, mainly among entrepreneurs and workers in the US manufacturing industry in the Rust Belt (decaying Midwest), and it was clear that US protectionism had already been born in Trump 1.0.
The background to Trump 2.0, which reappeared in January 2025, is mainly
the awareness of the "crisis of rising living costs" among ordinary
Americans, and it has a slightly different background from Trump 1.0.
According to a JNN report today, the majority of the public seems to be in favor of Japan immediately responding to the Trump reciprocal tariffs with similar reciprocal tariffs.
But if you think about it, even if the Trump auto tariffs are 25% or the 4.2 reciprocal tariffs are 24%, the yen is still about 34% weaker and the dollar is strong, even if the dollar-yen exchange rate is around 145 yen to the dollar, which is considered to be the purchasing power parity of 108 yen to the dollar.
So how will the Yomiuri editorial and NHK respond to the heretical rebuttal from U.S. President Trump, who has launched a policy of impoverishing our neighbors, a "currency war" rather than a "trade war," since April 2013 when Abenomics was launched, and has not stopped this policy even now?
Trump's reciprocal tariffs are a golden opportunity for Japan to make a great comeback
Rather than the Trump tariffs, which are difficult for Japan to control, isn't it more important for Japan to focus on achieving price stability and sustainable economic growth by making full use of our own macroeconomic policies, which we should be able to control ourselves?
In other words, it is most important to quickly establish and implement a policy mix of fiscal expansion and monetary tightening that will steadily raise the Bank of Japan's policy interest rate toward a positive real rate over the course of about two years, while permanently lowering the consumption tax rate to 5% toward the abolition of the consumption tax.
Rather, by using the Trump reciprocal tariffs as a scapegoat or smokescreen, the government and the Bank of Japan may be trying to cover up their own policy failures that have led to uncontrollable prices and economic growth.
If major domestic media outlets such as the Yomiuri editorials and NHK are either being carried away by this Imperial Headquarters reporting or are intentionally helping to encourage it, and thereby deceiving the general public, then their crimes are serious.
In any case, these actions by the Japanese media are further amplifying the vicious cycle that is very similar to that during the war, of currency war ⇒ trade war ⇒ hegemony war, and I cannot help but worry that Japan today is unable to dispel the fear that our country may be taking the lead down the slope to World War III.
In other words, wise citizens should realize that if Japan itself makes a
policy shift, it is entirely possible for Japan and the US to play a win-win
game even under Trump 2.0.
Democracy and market economy reconsidered after Trump's mutual tariff
shock
In contrast, in its editorial on New Year's Day 2025, the Asahi Shimbun editorial, titled "In an era of increasing uncertainty, focusing on politics to build a strong society," featured a passage from "The Narrow Corridor to Prosperity" by American economist Daron Acemoglu, who won the Nobel Prize in Economic Sciences last year, just like its Tokyo editorial on New Year's Eve.
In it, Acemoglu sharply points out that "To realize a free and prosperous country, Acemoglu argues that it is necessary for the state, which is a power structure, and the society, which is made up of citizens, to grow in balance."
The editorial goes on to say, "If left unchecked, the state will oppress its citizens. It is necessary for society to monitor the state and put shackles on it. Moreover, the corridor in which the two are in balance is very narrow."
In particular, five years ago, Acemoglu spoke to the Asahi Shimbun about Japan's challenges, saying, "There is a lack of movement among people to promote change from the ground up," and, "It is surprising that no movement to rebel has arisen after 25 years of stagnation."
As Acemoglu already intuitively knew five years ago, it is undoubtedly true that, unfortunately, we ordinary citizens of "boiled frog Japan" have been plundered and exploited by a political and economic system that is hereditary, privileged, and vested interests.
For example, the double whammy of taxation, consisting of a 10% consumption tax rate and an inflation tax of about 4%, is a classic example. It is inevitable to see that the authoritarian Japanese government itself is becoming a shackle to the low economic growth of our country.
In any case, a government and central bank that does not achieve price stability and sustainable economic growth will undermine the economic growth, efficiency, and stability of society, and may eventually cause democracy and capitalism to fail.
In short, wise citizens must bear in mind that achieving price stability and sustainable economic growth is an extremely important prerequisite for democracy and capitalism to develop and prosper without contradiction.
If things continue as they are, the Bank of Japan, held hostage by the
market, and the Ishiba administration, which is a fourth-rate copy of
Abenomics, may end up strangling "boiled frog Japan."
Can we really draw up and implement a "scenario for Japan's revival" that consists of a policy mix of expansionary fiscal policy, such as a permanent reduction in the consumption tax rate to 5%, and at the same time, austere monetary policy, in which the Bank of Japan's (nominal) policy interest rate is gradually raised over the course of about two years toward a real positive range above the inflation rate?
Finally, for the Japanese economy, which is suffering from the quadruple hardships of a declining birthrate, long-term stagnant consumption, a weak currency, and high prices, this is a golden opportunity to change our thinking and shift to a policy mix that simultaneously implements a fiscal expansionary policy of a permanent reduction in the consumption tax rate to 5% toward the abolition of the consumption tax, as well as a monetary tightening policy of gradually raising the Bank of Japan's policy interest rate toward a real positive interest rate over a period of about two years.
In other words, wise citizens should realize that if Japan itself makes a policy shift, it is fully possible to play a win-win game between Japan and the United States even under Trump 2.0.
The year 2025 marks 80 years since the end of the war and the 100th year of the Showa era, and we are now standing at a major crossroads that will determine the life or death of our country.
Whether or not we take advantage of this opportunity for a great revival of Japan depends entirely on the wise choices made by the Japanese people.
Tomoichiro Nakamaru, former World Bank economist
Supplementary Note: Currency War ⇒ Trade War ⇒ Hegemon War is Like Rashomon
As you know, Rashomon is one of Kurosawa's masterpieces, depicting witnesses and people involved in a murder case giving contradictory testimonies from their respective perspectives, and sharply pursuing human egoism. The film and its phrases are quite famous in the United States as well.
There seems to be one common denominator in the modern world, which is shaken by the Great Depression, the Lehman Shock, and the Trump Shock.
That is the failure of international policy cooperation.
Amid currency wars, trade wars, and rising geopolitical risks, the world is divided as people insult each other, saying that they are not at fault and that the other party is.
On the other hand, major creditor countries such as Japan and Europe rushed to implement unconventional monetary easing policies such as negative policy interest rates and quantitative and qualitative easing, spurring a de facto currency depreciation race.
On the other hand, the United States, which is a hegemonic power but also the world's largest debtor, has been hit by a strong currency and has implemented large-scale fiscal stimulus to increase employment. In the short term, the economy has overheated, and in the medium to long term, the United States has further inflated its twin deficits in finance and external balance.
The unorthodox Trump has been directing his growing frustration over the currency war and trade war at China, which has almost balanced its external balance with the world as a whole, by trivializing the problem to the size of its bilateral surplus with the United States. It was inevitable from the beginning that the US-China trade war would become increasingly intense.
The major players in the world economy are acting selfishly, putting their own interests first. Is it no wonder that the world economy is divided and world trade is on the brink of war? Trump 1.0 in November 2017 undoubtedly had an aspect of anger and rebellion against the authority and vested interests that are preventing true reform. Trump is certainly a heretic, but no one could deny the fact that the US president was born under a democracy that reflected the will of the people in the decaying Midwest. The same can be said for Trump 2.0 from 2025. Didn't the Japanese people just stand by and watch the US presidential election, leaving it to others? On the contrary, can we even deny the possibility that Abenomics and the Bank of Japan since 2013 are what pushed the heretic Trump to become the new president? And shouldn't we say that the whole world, including Japan, is now paying the price for that?
The two forgotten goals of an open economy
Tolstoy's famous novel "Anna Karenina" is famous for the opening
line, "All happy families look the same, but each unhappy family is
unhappy in its own way." This also applies to the world economy.
In the 1950s, Australian economist Trevor Swan argued that a nation's
economy should have two economic goals. One is domestic equilibrium and the
other is external equilibrium.
The most authoritative and best-selling international finance textbook for
undergraduates in the United States, "Krugman's International Economics:
Theory and Policy, Vol. 2, Finance (Krugman/Obsfeld)" (Maruzen
Publishing), also develops a discussion of internal and external equilibrium
based on Swan's diagram.
Internal equilibrium is price stability and maximum employment. It is
nothing other than the goal of sustainable economic growth or full employment
under stable inflation. It is important to note that the Bank of Japan's 2%
inflation target is only a part of this concept of internal equilibrium.
On the other hand, external balance means avoiding excessive current account deficits or surpluses. An excessive current account deficit makes it difficult to repay external debts, while an excessive current account surplus, on the other hand, can make it difficult for other countries to repay their external debts.
If both internal and external balances are satisfied, then such an economic nation is enjoying happiness. The Japanese economy is also required to aim for this simultaneous internal and external balance.
However, if either internal or external balance is not satisfied, then such an economy must be called an unhappy country, not a happy one.
In Swan's diagram, happy countries all look the same, as they simultaneously satisfy both internal and external balances.
However, unhappy countries have four different forms of unhappiness, depending on the combination of domestic prosperity or recession and external surplus or deficit.
Therefore, true international policy cooperation means that each country aims for simultaneous internal and external equilibrium through different fiscal, monetary, and exchange policy measures in the current state of internal and external imbalance.
There are two policy measures. The first is aggregate demand management policy (expanding or suppressing internal demand) mainly through fiscal and monetary policies. The second is changing each country's exchange rate (devaluing or revaluing).
Specifically, Japan and the euro area, which are currently enjoying external surpluses and economic prosperity, should revalue their currencies.
For the United States, which is enjoying an economic prosperity while suffering from an external deficit, it would be better to suppress domestic demand.
And for China, which is suffering from a recession but enjoys an external surplus, it would be better to expand domestic demand.
Are Japan, the United States, Europe, and China each heading in a better direction toward becoming a happy country?
Unfortunately, the world's major countries are reversing their progress
toward becoming a happy country, and internal and external imbalances are
expanding again. It was no surprise that the unorthodox US President Trump was
elected in November 2016.
It is also not surprising that now, in April 2025, Trump has launched a policy of mutual tariffs.
In particular, as Japan is experiencing a period of inflation and economic prosperity, we cannot ignore the problem of allowing the yen to continue to weaken.
The world economy is upside down, with creditor countries aiming for a weaker currency and debtor countries falling into a stronger currency.
If Japan, the US, the euro area, China, and other countries, each in their own misfortunes as described above, were to adopt optimal economic policies, the world could reach a uniform "happy country" of internal and external balance.
However, the current world economy, just like just before the Lehman Shock, cannot help but be seen as standing upside down.
According to the OECD Economic Outlook (December 2024), Germany has not moved to a stronger currency, but has continued to significantly expand its current account surplus to 6.6% of GDP under the European Central Bank, which adopts unconventional monetary policies, using the euro, the common currency in the region. The current account balance of the euro area as a whole also recorded a surplus of +3.7% of GDP.
Japan cannot escape criticism that it is still aiming for a significant
depreciation of the yen due to the Bank of Japan's continued extraordinary
easing. As a result, Japan's current account surplus has risen to +4.4% of GDP.
The United States has been booming and has been driving the world economy.
However, with a current account balance of -3.8% of GDP and a significant
external deficit, it would be better to tighten domestic demand, and the Fed's
continued interest rate hikes are the right direction, but President Trump has
been calling for large tax cuts and even lowering of the Fed's interest rates,
and it cannot be denied that there is a lack of internal consistency.
If the world's major countries are unable to simultaneously achieve
internal and external balance and each falls into an unfortunate situation, the
world economy will not be uniformly happy, and conflict and division will be
inevitable.
In particular, major creditor countries such as Germany and Japan are accumulating external surpluses through currency depreciation policies, while the United States, the largest debtor country, is expanding its external deficit through a strong dollar. The imbalances in the world economy have been hidden by the short-term overheating of the US economy, and the seriousness of the expansion of the imbalances in the world economy will inevitably be highlighted.
With the imbalance in the global economy expanding to this extent, international financial markets alone cannot remain safe.
It is not surprising that a storm has begun to blow in international financial markets since the emergence of Trump 2.0, especially since the end of February.
The problem is that if things continue as they are, we will eventually see a currency war ⇒ trade war ⇒ war for hegemony, and the exchange of mutual tariffs poses the risk that even a real war would not necessarily be unrealistic.
Japan cannot afford to miss this golden opportunity to achieve a great
revival for Japan by at least coming up with a win-win game plan with our ally
the United States, and by making major changes to Japan's political, economic,
and financial systems from the 1940 wartime system, where hereditary
succession, privilege, and vested interests are rampant.
