Japan's deal: 15% and $550bn

With a 25 per cent tariff deadline about to expire, Tokyo gave in. Its trade pact with Washington sets a 15 per cent baseline tariff on Japanese goods, and Japan has promised $550 billion of private and state-directed investment in the United States to seal it.

A weak hand in Tokyo

The timing tells its own story. Two days before the deal was announced, the ruling coalition lost its majority in the upper house of the Diet, having already lost control of the lower house last October. Shigeru Ishiba's position is precarious, and a government in that state has little appetite for a long confrontation with its main ally. Tokyo had sent its negotiator to Washington repeatedly since April without result. The prospect of a 25 per cent levy on everything from 1 August concentrated minds on both sides.

Factories for market access

The deal writes into policy the idea that a country can buy lower tariffs with investment. Japan's industrial groups, among them Toyota, Mitsubishi, Panasonic and Nippon Telegraph, are to pay for hundreds of billions of dollars of American battery gigafactories, chip-packaging plants and energy infrastructure over the next five years. In return Japanese exporters escape the 25 per cent penalty and pay a more manageable 15 per cent.

The 15 per cent rate is also meant to cover cars, which since April had faced a separate 25 per cent duty on top of the long-standing tariff. For Toyota, Honda and Nissan that is the most valuable part of the bargain, because cars and parts are Japan's biggest exports to America. It still leaves them paying several times what they paid before this year, while American-built rivals pay nothing.

What the $550 billion really is

The headline figure is less solid than it looks. No detailed text was published alongside the announcement, and the two sides have described the investment differently. The White House has said America will receive the bulk of the profits. Japanese officials have described much of the sum as loans and guarantees from state-backed lenders such as the Japan Bank for International Cooperation, rather than cash from company balance sheets. Those two accounts cannot both be right, and the gap between them is where the next dispute will come from.

There is a recent model for how such bargains work. Nippon Steel completed its purchase of U.S. Steel in June only after agreeing to large investment commitments and giving the American government a so-called golden share with veto rights over key decisions. The lesson Japanese boards will draw is that access to America now comes with conditions set in Washington, not only in contracts.

The 1980s, in reverse

Japan has bought its way into the American market before. Under pressure from Washington in the 1980s, Honda, Toyota and Nissan built plants in Ohio, Kentucky and Tennessee, and Japanese investors went on to buy trophy assets such as Rockefeller Center and Columbia Pictures by the end of the decade. The factories were a success and still employ tens of thousands of Americans. The trophy purchases mostly lost money. The difference was whether investment followed commercial logic or political pressure, and a pledge negotiated under a tariff deadline leans towards the second.

Less for shareholders at home

The deal heads off an immediate trade embargo. But committing $550 billion of capital pulls money away from investment in Japan and from dividends to shareholders.

That matters because Japanese companies had only recently started to reward their owners. In 2023 the Tokyo Stock Exchange asked listed firms trading below book value to explain how they would improve returns on capital, and buybacks and dividends have risen since. Foreign investors bought Japanese shares partly on that promise. Cash earmarked for American factories, or for guarantees on them, is cash that cannot go to buybacks.

A template for others

The deal matters beyond Japan because it sets a price. Seoul faces the same 1 August deadline and exports many of the same things, from cars to machinery, and it will now be expected to offer a comparable investment pledge for a comparable rate. European negotiators, still bargaining in Brussels and Washington, have been handed the same benchmark. Each country that pays in investment makes it harder for the next to refuse, and turns 15 per cent into the going rate for an ally.

For Japan's public finances the pledge is not free either. Loans and guarantees from state-backed lenders are contingent liabilities of the Japanese state. If the projects they back lose money, the losses fall on Japanese taxpayers, and the upper-house result shows how little patience those voters already have.

The case for the deal

The fairest defence is that the alternative was worse. A 25 per cent tariff would have hit every exporter at once, and Japanese carmakers would have faced it on top of intense price competition from China. Some of the promised investment would have happened anyway, since Japanese firms were already expanding American production to get closer to their customers, and a lower tariff protects the value of plants they already own. Seen that way, Tokyo paid a price in slogans for a real reduction in tariffs.

The trouble is that the tariff is still far higher than before and could be raised again if Washington decides the investment is too slow. What would change the call is a written agreement that fixes the rate, defines what counts as investment and limits America's right to reopen the terms. Watch also whether Japanese firms announce specific American projects over the coming quarters, or whether the money stays in the form of state credit lines that are never fully drawn.

Japanese companies keep their access to the American market, but for the next five years a large slice of their cash will go into American industrial policy rather than into plants at home or payouts to their owners. Shareholders in Japan's big exporters should expect slower growth in buybacks from next year, and Tokyo should expect Washington to come back for more whenever the investment figures disappoint.