TOKYO – In the case of Japan’s beleaguered prime minister, Shigeru Ishiba, the head of lettuce has very good odds.
The reference here is to the Liz Truss crisis of late 2022. At the time, the then-UK prime minister attempted to sneak a sizable, unfunded tax cut past bond traders. The extreme market turmoil that followed had a UK tabloid live-streaming a head of lettuce next to a Truss photo to see if it could outlast her premiership. The vegetable won.
On Wednesday, Ishiba warranted his own live-stream as he tried to deny press reports that he would resign this month or next following a dismal election result over the weekend. With approval ratings in the 20s and an upstart far-right party doing shockingly well on Sunday, Ishiba’s days are seemingly numbered.
Yet here’s a question no one is really asking: what difference would it really make if Ishiba stepped aside for another Liberal Democratic Party (LDP) prime minister to be named later?
Unpopular as he is, there are two dynamics buying Ishiba some time. One, seeing through the brand new US-Japan tariff deal. Many in Tokyo political circles don’t want a total power vacuum this week as US President Donald Trump’s team and Tokyo discuss exactly what they’ve agreed to. Two, a dearth of obvious successors.
The first issue has Tokyo in the spotlight for unexpected reasons. As the Japan outcome suggests, Team Trump has settled on a 15% average tariff everywhere as a de facto American value-added tax, hoping to collect about US$400 billion per year.
The 15% level is probably the result of Trump’s inner circle factoring in the “early lessons” about the impact of earlier import levies, says Goldman Sachs economist David Mericle.
At the very least, the trade deal news “raised hopes that the US might be about to reach deals with other countries that avoid the higher tariffs on August 1,” Deutsche Bank analysts write in a note.
In Japan’s case, Tokyo probably doesn’t want Ishiba’s leadership team out of commission as it pores over details on sectors from autos to agriculture to semiconductors to pharmaceutics. That’s because, for now, Japan feels like it got off easier than feared in US talks.
The second is that the LDP has led Japan with only two brief interruptions since 1955. Over the last 20 years, it’s seen few notable changes to its policy goals and tactics. And since October, Ishiba hasn’t shown himself to be one to upend the status quo. If the LDP calls a general election, wins and names a new premier, little will change. That is, unless the party pivots to a new policy agenda – also to be named later.
Though painful enough, the 15% tariff is well below the 35% Trump threatened. The lower tariff includes autos, which had been staring down a 25% Trump tax. Nor did Japan offer a slew of big concessions. And the US enforcing a pledge for $550 billion of investments in the US is easier said than done. Japan’s carriers already buy loads of new Boeing jets.
“This is not a massive trade agreement,” says economist Mary Lovely at the Peterson Institute for International Economics. “It’s an agreement in which the Japanese open up their markets in some important ways, but they’re basically swallowing a 15% tariff on their exports to the US.”
A 15% auto levy is key. “If correct — surging shares in auto companies suggest it might be — that rate would allow Japan’s beleaguered car makers to breathe a sigh of relief,” says Stefan Angrick, economist at Moody’s Analytics.
“And they may have little to fear from US competition on their home turf,” Angrick says. “Lowering or removing trade barriers against U.S. vehicles won’t make them any easier to drive on Tokyo’s cramped streets, even if it would theoretically move the needle on Japan’s surplus with the US.
The worry, of course, is that Team Trump tries to claim it has a different interpretation of what the US and Japan agreed on. US automakers are already complaining that they must pay a 25% import tax on imports from their suppliers and plans in Canada and Mexico, while Japan pays just 15%.
“The precedent set by the US-Japan deal is likely to provide a new negotiating target for South Korea, the European Union, and other countries that are trying to strike their own deals with the United States before the August 1 deadline, as well as for US negotiators who may want to encourage investment pledges similar to that offered by Japan,” says Kristi Govella a senior adviser at the Center for Strategic and International Studies.
For many stakeholders in US-Japan relations, Govella says, “the announcement of this deal comes as a relief, as it may enable the two countries to move forward with cooperative bilateral endeavors related to economic security, the US-Japan alliance, and other matters that have been sidelined by tariff issues since the beginning of the Trump administration.
However, “additional challenges lie ahead,” Govella cautions. “The US government has already indicated that it expects greater burden sharing from Japan and other allies, including a potential increase in Japanese defense spending, so these issues are expected to be on the bilateral agenda moving forward.”
Not surprisingly, South Korean officials are studying the pact as new President Lee Jae Myung prepares for his turn in the Trumpian hot seat. As Industry Minister Kim Jung-kwan puts it, “we will make an all-out effort to produce a positive sum result that will allow Korea-US industrial and energy cooperation to be upgraded to the next level.”
Kim Yang-hee, a trade expert at Daegu University, notes that Lee’s government “will find it hard to accept a deal where there is a major difference with that of Japan.”
Yet the leader who’s likely to replace Ishiba in the weeks or months ahead faces a daunting to-do list. Not least of which is making the governing coalition that the LDP requires to retain power work. That’s very likely to require a sizable tax cut to placate opposition leaders.
The LDP’s big loss in upper house elections on Sunday spooked the bond market, where traders worry about Tokyo’s already crushing debt load. At 260% of gross domestic product, Tokyo’s debt burden is the biggest among major economies. And it’s about to get bigger.
On Wednesday, Tokyo held its weakest 40-year bond auction since 2011 amid concerns about increased government borrowing and inflationary effects of tariffs. The bid-to-cover ratio, the main barometer of demand, was just 2.127 versus 2.214 at the previous auction, which was rather underwhelming, too.
Stocks are doing better, of course, as lower tariffs reduce the intensity of headwinds heading Japan’s way.
Yet “as long as the political situation doesn’t deteriorate too much more, we suspect Japan’s equity rally has further to run,” says Thomas Mathews, economist at Capital Economics. For debt markets, “our sense is that investors are still underestimating how fast the central bank will hike this year and next.”
The US-Japan tariff agreement muddies the outlook for Bank of Japan rate policy. As BOJ Deputy Governor Shinichi Uchida put it Wednesday, the pact reduces uncertainty over the nation’s economic outlook.
“I don’t think this (tariff deal) alone will lead to a Bank of Japan rate hike next week, but the possibility of a rate hike between September and October has increased,” says Hirofumi Suzuki, strategist at SMBC. “However, if anything, political uncertainty is having more of an impact on the market, and the pressure for yen depreciation is likely to continue.”
Inflation was a key issue in Sunday’s election, a dynamic that’s tripped up incumbent governments around the globe.
“In last year’s elections around the world, inflation caused every incumbent party in affluent countries, whether liberal or conservative, to suffer a drop in their vote share,” says economist Richard Katz, author of The Contest for Japan’s Economic Future. “A large number were tossed out of power altogether. Never before, in 120 years of record-keeping, has this happened.”
Katz says that “I’d argue that inflation brought things to a head because it embodied underlying discontent with the long stagnation—or, for millions, even fall—of living standards — parallel syndromes exist elsewhere, as shown by the widespread rise of right-wing populist parties.”
Inflation pain is also colliding with anti-immigration sentiment. The “Japan first” far-right Sanseito Party, “has capitalized on public anger over the economy to push strident anti-foreign rhetoric,” Angrick says.
“That rhetoric has struck a chord, as more and more ordinary citizens are priced out of housing and services while foreign investors snap up real estate and record numbers of tourists flood the country.”
As a possible next government gets to work, it will have to address Japan’s version of Donald Trump’s #MAGA movement in the US. Not to mention bracing for the risk that Xi Jinping’s China is less keen on agreeing to its own US tariff deal.
If so, there’s no telling where US tariffs on Asia’s biggest economy might be a month from now. The same goes for the intensity of trade headwinds Ishiba’s replacement might face. At that point, Japan’s next, next leader might face their own contest with a head of lettuce.
Follow William Pesek on X at @WilliamPesek
