Nikkei Publishes An Op-Ed by Me on Trump Tariffs

LDP Needs Diet Approval for JBIC Funding of Trump’s Projects

Yesterday, Nikkei published an opinion piece by me on how Donald Trump’s tariffs will impact Japan’s exporters. It’s available to paid subscribers at https://www.nikkei.com/article/DGXZQOGN160040W5A810C2000000/ I am only allowed to quote brief excerpts. So this is it:

“Some experts are optimistic that Japan's export industry will be able to absorb the costs of tariffs because the weak yen has significantly increased profits. However, this is not the case if the exchange rate is around ¥145 per dollar, Toyota can absorb the ¥1 trillion ($6.8 billion) cost of a 15% automobile tariff and make profits [it estimates ¥3 trillion ($20.4 billion) in earnings after the tariffs—rk]. However, few companies are as resilient as Toyota. According to a 2024 Cabinet Office survey of 587 large listed Japanese manufacturing exporters, the 40 most competitive companies expected to be able to record profits [on their exports] even if the yen rose to ¥101. However, the 127 least competitive companies [22% of these listed firms] would need the yen to weaken to the ¥146-152 range to be able to compete and maintain a profit. The Trump administration's tariffs mean that further yen depreciation will be necessary for these and some other leading exporters.”

Next PM Needs Diet Approval To Fund Ishiba’s Investment Promises To Trump

Prime Minister Shigeru Ishiba has tried to avoid making the investment MOU or any other part of his deal with Trump a legally binding pact because it would be subject to Diet approval. That’s one reason the MOU says it is not legally binding. However, every year, the Diet has to approve the budget of the JBIC, the vehicle by which the Japanese government will fund Trump’s projects (see this post). Moreover, to the extent that JBIC issues bonds internationally, these are guaranteed by the government, so any default on a given project would affect national budget and deficit.

Given the minority status of the LDP/Komeito coalition, the incoming Prime Minister needs support from at least one opposition party. I suspect such parties would not want to be blamed for giving Trump an excuse to raise tariffs, but I also suspect that any party willing to comply would want to extract a high price, either affecting the terms of the MOU or some other issue, e.g., taxes. This could become contentious, and the public will become aware of how much Ishiba gave away. Certainly, critics will ask how come the LDP got a much worse deal than did the EU and Korea (see below).

Neither EU nor Korea Made Similar Surrender

Defenders of Tokyo’s surrender to Trump argue that this was the only alternative to Trump’s tariffs on Japan continuing at 25%. But both the EU and Korea (tentatively) achieved tariff reduction without making concessions anywhere in the same ballpark. The EU is got giving Trump any government money; it simply provided a projection of what it expected private companies to do. Those companies will make the profits; there’s nothing about 90% going to the US. Trump is trying to coerce Korea into making the same deal as Japan, but it says it will not. Neither the EU nor Korea gave Trump permission to raise tariff rates if the reality failed to meet their projects.

Correction On Calculating the 50/50 and 90/10 Terms

The ambiguity led me a possible misinterpretation of how the money coming from these projects are shared between the US and Japan. Using a more generous (and I think more reasonable) interpretation of the terms, reduces my estimate of the possible harm to Japan. I have corrected yesterday’s post on this and the following is what it now says, with the changed passages in italics.

In this deal, Japan and the US share on a 50/50 basis (net of US taxes) the profits of the project until they reach a so-called “Deemed Allocation Amount.” What is the latter? It has two components.

The first component is interest on the investment, as in a loan. The rate is the rate on a “six-month SOFR”—now around 4%—plus a “spread” to be determined by the length of the project and a risk premium. If the total were 6%, then Japan would get 3%.

The second component is repaying the loan. Although the MOU does not say so, I presume this includes whatever interest JBIC has to pay on the bonds it issues. This is one of those cases where the MOU is open to contending interpretations. If constructing the project takes ten years, then Japan supposedly gets back 10% of its investment each year, but only if the project generates enough operating profit to afford the repayment.

Here’s the catch. The money to pay back Japan comes from the project’s so-called “free cash flow.” The latter is the revenue from operations minus all expenses, including investment expenses. Often, in a new complex project, the required investment can exceed the revenue for several years. Think of the years needed to build the Alaska pipeline. In that case, there may not be enough money either to pay the interest or repay the initial loan for years, perhaps never. So, Japan could lose a lot.

On the other hand, suppose the project earns a 20% annual return on investment above and beyond the interest. 90% of the excess profits go to the US, just 10% to Japan.

So, if the project is a loser, Japan loses; if it’s a winner, the US wins.

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