How Trump’s uncertainty has left the US-Japan trade pact in limbo

Last week, Japan’s top trade negotiator, Economic Revitalisation Minister Ryosei Akazawa, travelled to Washington in a bid to finalise a trade deal with the United States. However, the visit ended without a breakthrough. Akazawa departed the US capital on Friday with no signed agreement, leaving both countries’ business and financial communities in continued suspense over the outcome of ongoing negotiations.

The lack of progress has been attributed to a persistent issue: the US has not provided a coherent outline of its trade objectives. According to reports, Japanese negotiators are frustrated by what they see as a moving target — the US trade delegation keeps changing its demands, making it difficult to finalise any meaningful deal.

“The Japanese side has been trying to understand what the US actually wants,” one source familiar with the negotiations stated. “But there’s no clear or consistent answer coming from the American side.” This inconsistency has led to a notable divergence in tone between the two camps. While the Trump team publicly hailed “big progress” in the talks, Japanese officials have expressed far more caution, indicating that substantial differences remain.

Market Impact and Growing Investor Caution

The uncertainty surrounding the US-Japan trade talks has already begun to ripple through global markets. The lack of a clear path forward has led to a drop in the US dollar’s value, a spike in bond yields, and a growing “flight to safety”, with investors piling into traditional havens such as gold — and more recently, even Bitcoin.

Japan’s bond market, in particular, has seen significant shifts. Foreign investors poured a record ¥2.18 trillion ($15.5 billion) into Japanese government bonds with maturities exceeding 10 years in the last month alone. Total foreign purchases across all bond durations hit ¥6.03 trillion, marking the second-highest figure on record since 2004, according to the Japan Securities Dealers Association.

This trend reflects heightened global concern about trade instability and the unpredictable nature of US economic policy. The Trump administration’s tariff hikes have increased global market volatility, prompting investors to seek safer, longer-term Japanese assets.

At the same time, Japanese insurance companies have responded by reducing their exposure to superlong bonds, selling a record ¥645.8 billion in March. Yields on 30-year Japanese government bonds surged to their highest level since 2006, driven by both the Bank of Japan’s reduced purchases of long-term debt and the turbulence in US Treasury markets.

Historical Context: Trade Frameworks in Place

Despite their long-standing economic partnership, the US and Japan do not currently share a comprehensive bilateral free trade agreement (FTA). Instead, they have a patchwork of more limited arrangements. Two such deals were signed in 2019 during President Donald Trump’s first term: the US-Japan Trade Agreement (USJTA), which targeted tariff reductions and increased quotas on selected goods, and the US-Japan Digital Trade Agreement, which focused on e-commerce and data governance rules.

These agreements officially entered into force on January 1, 2020, after domestic ratification in both countries. The USJTA covered key areas such as agriculture and industrial goods, allowing better market access for US farm products in Japan and Japanese machine tools in the US. One of its achievements was staving off then-looming US tariffs on Japanese automobiles.

In 2023, under the Biden administration, the US and Japan further deepened their economic ties by signing a critical minerals agreement. This deal enabled Japan to benefit from incentives under the Inflation Reduction Act (IRA), particularly for electric vehicle battery materials, as Washington looks to diversify its supply chains away from China.

Despite this progress, tensions remain. Japanese Prime Minister Shigeru Ishiba recently emphasised that Tokyo has no plans to cancel the 2019 agreements. However, he voiced “grave concern” about what he sees as US actions — especially new automobile tariffs — that contradict the spirit and terms of existing deals.

A Faltering Negotiation Process

The trade talks, which began in April 2019, were initially seen as one of the more manageable diplomatic efforts in the Trump administration’s broader tariff campaign. Yet the stalled negotiations underscore a deeper issue: Washington’s lack of a coherent negotiating strategy.

Former Assistant Secretary of Defence Chas Freeman harshly criticised the US’ approach, calling it “cockamamie”. He described the talks as disorganised, saying that when Japanese negotiators asked what the US wanted, the American side failed to provide a clear answer. “This is not how negotiations are supposed to work,” Freeman said. He further questioned how more complex negotiations — such as those with China or the European Union — could progress if even an allied country like Japan faces such challenges.

Polling data from Japan shows that public confidence in the government’s ability to reach a favourable deal with Washington is low. According to a recent survey, 70 per cent of respondents do not believe Tokyo will succeed in securing a beneficial outcome. Only 22 per cent remain optimistic.

Political, Economic, and Security Crossroads

Prime Minister Ishiba has stressed the importance of maintaining a clear separation between trade negotiations and defence-related discussions. Over the weekend, several potential compromises — such as Japan increasing imports of US soybeans — were floated as ways to close the gap. But Ishiba pushed back, saying such gestures should not be conflated with broader national security talks.

“Tariff negotiations are tariff negotiations. National security discussions are national security discussions,” Ishiba told lawmakers on 20 April. “If we don’t keep them separate, I believe we risk distorting the essence of each issue.”

Japan’s position reflects a broader concern that US trade policy, particularly under Trump, often blends economic and geopolitical concerns in ways that can complicate diplomacy. By drawing such lines clearly, Japan hopes to protect its strategic autonomy while navigating an increasingly transactional US approach to foreign policy.

Looking Ahead

For now, the future of the US-Japan trade relationship remains uncertain. While both countries continue to express a desire to deepen their economic ties, the lack of strategic clarity from the US side has become a major obstacle.

With Japan’s economy facing slow growth, the Ishiba government’s approval ratings are diminishing. Meaningful progress is not feasible without a clear and unified message from Washington. Tokyo’s patience — and the broader global confidence in the US as a negotiating partner — could continue to erode.

Until then, markets will remain on edge, and investors will likely continue to seek safety in Japan’s debt market, while policymakers in Tokyo wait for Washington to decide what it truly wants.

This has concerns for the progress on the Quad and its early convening of a summit.

The author is a former ambassador to Germany, Indonesia, Ethiopia, ASEAN and the African Union. He tweets @AmbGurjitSingh. Views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect Firstpost’s views.