Ishiba Handling of Nippon Steel Shows Tokyo’s “Placate Trump” Posture
Tokyo Seeks Exemptions From Ruinous Universal Tariffs
Note: $10 billion instead of billion, so $4 for automotive equals $40 billion
FLASH ON YEN:
Source: Data from WSJ
The chart above shows that the yen/$ has broken out of a pattern and is substantially weaker than expected. If the pattern prevailing since last August—and more or less since 2021—were holding, the yen/$ would be around ¥142/$. Instead, it is around ¥149. The yen has gotten a bit stronger, but the move has been nowhere close to what the rate gap predicts.
In the short-to-medium term, there is a very tight correlation between the yen/$ and the gap between American and Japanese interest rates on 10-year government bonds. The larger the gap, the weaker the yen. The chart at the top shows a narrower rate gap and a stronger yen when the lines go up. Fear of stagflation—due to Donald Trump’s tariffs and other policies--has caused a drop in US interest rates and, thus, a sharp narrowing of the gap (the upward motion of the light blue line). But the yen (the dark blue line) has failed to move with it.
It’s too soon to know whether the yen will move back into alignment with the rate gap or if this is another ratchet downward in the longer-term trend of the yen. But we do know that, when countries raise their tariffs, their currency tends to weaken, reducing the trade impact of the tariffs. Trump just announced he is enforcing tariffs of 20-25% vis-à-vis China, Mexico, and Canada, which together account for 45% of US imports. Retaliations have been announced. The turmoil, say experts, is causing investors to move to “safe haven” currencies like the Swiss franc and Japanese yen.
DON’T POKE THE BEAST
Tokyo’s “don’t poke the beast” approach to Donald Trump’s trade war was foreshadowed by Prime Minister Shigeru Ishiba’s preemptive concessions on Nippon Steel (NS) during his February 7th summit with Trump in Washington. Before Ishiba even stepped on the plane, several sources told me, Tokyo had decided on his message to Trump: he supported the notion of Nippon Steel simply investing in US Steel rather than buying. While Tokyo informed NS of the decision in advance, NS did not agree and is still pushing for a 100% buyout. Washington was not informed in advance.
It is not clear whether or not Ishiba told Trump that Nippon Steel had agreed or left that ambiguous. In any case, at their post-summit press conference, Trump claimed that NS had agreed, which is untrue. Either Trump heard what he wanted to hear, or he just lied. In any case, Trump declared, “Nissan [referring to Nippon Steel] is going to be doing something very exciting.... they’ve agreed to invest heavily in US Steel as opposed to own it.” Ishiba could have simply refrained from correcting Trump in the name of diplomacy. Instead, he went so far as to endorse it, saying, “as Mr. President says, it is not acquisition, it is investment.”
Ishiba did get Washington to agree to let a senior NS executive meet with Commerce Secretary Howard Lutnick (NS wanted Trump himself) and called that a step forward. NS was grateful for that, according to sources familiar with its thinking. However, said Ishiba, it’s up to NS to negotiate the equity share (i.e., whether it’s 100%, a majority less than 100%, or even a minority share, which deprives it of control). NS insists it will use the merger agreement as the starting point for any discussion, but that’s likely to be a non-starter in Washington. Trump insists NS cannot buy a majority share.
Bigger Fish To Fry
Why did Ishiba decide to undercut Nippon Steel in order to placate Trump? For one thing, with the Liberal Democratic Party (LDP) facing elections this summer and Ishiba doing poorly in the polls, he needed to have the summit look like a success. Disagreeing with Trump on a well-known issue would be a recipe for failure, as President Zelensky found out.
Indeed, when Ishiba was being prepped for the summit, explained reliable sources, he was advised: don’t disagree with Trump; speak in short passages; don’t use logic on him; talk about how Japanese investment benefits America. Speaking on Japanese TV after his return, Ishiba said that Trump was adamant about US Steel remaining an American company and that any NS investment in US Steel should be less than 50%. “If I had immediately rejected that from the outset, the negotiation would have just fallen apart, so I decided not to do so.”
The second consideration is Japan’s economic priorities. This is my surmise rather than something sources told me. While the NS issue is very important to Japan as a matter of US-Japan relations, its economic importance is dwarfed by the much larger threat of 25% tariffs Trump says he will impose on all imports from any country of autos, computer chips, and pharmaceuticals. Japan’s domestic automotive shipments alone account for 20% of all manufacturing shipments, 20% of all Japanese exports, and a whopping 40% of its total exports to the US. At a time when Japanese companies are suffering big drops in market share throughout Asia in the face of Chinese inroads, a big loss in sales to North America would be a disaster for Japan. By contrast, steel provides just 1% of Japan’s exports to the US. The number of Japanese employed at Nippon Steel is only one-eighth of the number of automotive production workers (see chart at the top).
So, how does Tokyo intend to respond to Trump’s trade war? One strategy might be to join with other nations in Trump’s line of fire. After all, Trump is also threatening 25% across-the-board tariffs on imports from the European Union, 25% on Mexico and Canada, and another 10% hike on China (on top of previous hikes), etc. Instead, Japan is going it alone in what one informed source called “a low profile” approach. It will seek an exemption from such tariffs regardless of what Trump does to other countries. Indeed, Yoji Muto, the Minister of Economy, Trade and Industry (METI), is arranging a trip to Washington to ask for such exemptions. (Of course, Japan’s global exports to tariff-hit countries will be greatly hurt even if Trump exempts Japan.)
One does not get exemptions from Trump by confronting him on this or that issue, or by arguing economic rationalities. Instead, one offers gifts that increase his power by making him look better in the eyes of his voter base. Things like a backtrack on the steel merger or by telling Trump that Tokyo wants Japanese companies’ direct investment into the US business sector [building or buying companies or big shares of existing companies] to rise from $783 billion at the end of 2023 to $1 trillion or by importing more fossil fuels from the US instead of other countries. Of course, private companies have to make these decisions, and the Prime Minister cannot force them. But speaking in the tones of a supplicant helps the “tough negotiator for America” image Trump likes to parade. Seeking exemptions, neither retaliation nor coordination with other countries is Japan’s chosen course.
Can Nippon Steel Change Trump’s Mind?
Nippon Steel cannot buy US Steel (USS) without Trump’s approval. Moreover, if NS acquiesces to only a minority interest, the deal may also fall through for legal reasons. Since the original deal required the approval of USS shareholders, such a material change in the terms would most likely require another USS shareholder vote and it may be hard to get approval for inferior terms. So, to be sure the deal will go through, NS really needs Trump to agree to a 100% buyout.
What could NS do to induce Trump to change his mind? While Trump has reversed himself on occasion, he did so only when it benefitted him and it did not involve his own core beliefs. He had called for a ban on TikTok but reversed himself because the TikTok audience turned out for him. He opposed cryptocurrencies but then reversed himself when crypto companies contributed massive amounts to his campaign. Moreover, he issued his own “meme coin” and made $100 million in trading fees, even as 800,000 of his supporters lost $2 billion when its price crashed. Trump’s Securities and Exchange Commission has since ruled that meme coins are not subject to regulation.
Besides, while few voters care about either TikTok or cryptocurrencies, lots of blue-collar voters in the Midwest industrial states—but not the workers in the steel plants—have bought into the opposition to NS as a nationalist issue. Reversing himself on the buyout could hurt Trump politically.
What could NS offer Trump to change this? When I asked a source familiar with NS’ thinking, he contended that “everything with Trump is transactional.” In other words, he doesn’t really believe in anything. So, NS is willing to make additional concessions that allow Trump to brag: “The previous deal was a bad deal; I got US Steel a good deal.” While I agree that there are few things Trump really believes in aside from his own power, money, and ego, I believe he truly is a rabid nationalist, protectionist, and isolationist.
But NS is convinced that if it offers the right concessions, it might succeed. The answer, in its view, is security guarantees that put Americans in charge of issues like laying off workers, closing down plants, or the merged company’s stance on import tariffs. I’m doubtful these concessions will do the trick, but with Trump, one never knows.
The process will begin with a meeting between Secretary Lutnick and a senior NS executive, probably Executive Vice President Takahiro Mori. While Lutnick has no power to make a decision, NS hopes he will try to persuade Trump that it’s a good deal and secure a meeting with Trump himself for NS CEO Eiji Hashimoto.
What Will NS Ask Trump To Approve?
NS wants Trump to approve the original merger deal. NS would buy 100% of US Steel at the price of $55 per share for a total of $15 billion. Plus, it will inject at least $2.6 billion into modernization and decarbonization technology in USS’s backward blast furnaces, and it won’t shut down existing blast furnaces for an indefinite period of time.
While Trump insists NS can only buy a minority share, my source said NS would say to Lutnick: “You are an investment banker. If a client came to you and asked if it should invest billions without getting enough shares to control the company, you’d advise them to say no. So, why should we do that?” I doubt Trump is moved by such logic.
There might be some conditions under which Nippon Steel would accept a controlling share that is less than 100%. However, if NS can only buy 75% of the shares, they’re not worth $55. And should NS accept something less than 51%, their value is much, much less. However, asking US Steel to accept less than $55 would violate the existing contract.
The Deadline
Unless the two companies and the Trump administration come to an agreement by June 15th, then, under the ruling by the Biden Administration, the merger is terminated. While an extension is legally possible, it would take an agreement by all three parties. So, unless the parties are getting close to an agreement, said a source in the US investment community, an extension is highly unlikely.
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