Top Risks 2025: Implications for Japan

 

IMPLICATIONS FOR JApan
In 2024, the TV series Shogun was a huge hit in the US. The ten-episode series takes place at the dawn of the Edo period, when Japan isolated itself from world politics. Isolation, however, is not an option for modern Japan. International trade is its economic lifeblood. And without the US, Japan's own security would be at risk. As a result, Japan must skillfully manage geopolitical risk, even though it is a famously risk-averse society.

Eurasia Group's Top Risks 2025 report suggests that the coming year will test Japan's diplomatic skills. It will have to deal with pushy world leaders such as President-elect Donald Trump and President (forever) Xi Jinping. It will also have to handle the adverse effects of trade spats, inflationary pressure, and a volatile yen.

Two prominent risks relate to the US, Japan's most important ally. Trump tariffs, covered in Top Risk #4 (Trumponomics), could punish Japan's economy, especially if they hit Japanese automobile imports. Also, if Trumponomics reignites US inflation, that could roil Japanese consumer prices, monetary policy, and the yen. Top Risk #3 (US-China breakdown) will also be deeply concerning for Japan. China and the US are Japan's top trading partners, so Japan would likely suffer collateral damage from a blowup in ties between Washington and Beijing.

Below is a further discussion of how those two risks and others could affect Japan. For the full list of the top global risks this year, please see Eurasia Group's Top Risks 2025.

• The US is Japan's most important partner. No other country comes close. And that dependence on the US is why Top Risk #4 (Trumponomics) is Japan's top risk for 2025. On trade, two things make Trump tick: he loves tariffs, and he hates trade deficits. The US goods trade deficit with Japan has been stuck at about $70 billion annually for many years. Most of that deficit is because of Japanese automobile imports. The good news for Japan is that the US has larger trade deficits with other countries such as China ($279 billion), Mexico ($152 billion), and Vietnam ($105 billion), so those countries will be in the crosshairs for Trump 2.0. But the bad news is that the US trade deficit with Japan will also put it on Trump's trade target list.
• The first Trump administration slapped tariffs on Japanese steel and aluminum imports, saying they were a national security threat. Trump 2.0 is likely to threaten similar tariffs on Japanese automobile imports. Japanese car makers are girding for it. Honda and Nissan's recently announced merger is partly driven by fears about Trump's tariffs. Also, Toyota is contributing for the first time to a presidential inauguration ceremony, donating $1 million to Trump's. The automaker probably took that uncharacteristic step to hedge against the personalistic nature of Trump's incoming administration, as explained in Top Risk #2 (Rule of Don). Japanese firms that sit on the sidelines may find themselves at a disadvantage during Trump's second term.
• But Trumponomics creates more than just tariff risk for Japan. It could also affect Japanese consumer prices, monetary policy, and the yen. If Trump's policies spark a rebound in US inflation—thereby weakening the yen and contributing to Japanese inflation—that will affect how the Bank of Japan proceeds with its own monetary policy normalization plans. That's a danger also highlighted in Top Risk #7 (Beggar thy world). The weak yen—and the resulting rising cost of energy and food imports for Japanese households—was a reason for the ruling Liberal Democratic Party's poor performance in the lower house elections in October. So, Trumponomics could have tangible political effects for Japan ahead of the pivotal upper house elections set for July.
• While risk from the Rule of Don will hang over Japanese firms doing business in the US, it will also loom over Prime Minister Ishiba Shigeru. He is unlikely to replicate the warm relationship that former prime minister Abe Shinzo had with Trump, but he should be able to establish good relations with Trump. This will not insulate Ishiba from arbitrary decisions by the incoming president—such as extreme demands for Japan to boost financial support for US troops stationed there—but Ishiba has a couple of cards that he can play against Trump. Japan has been the US's top foreign direct investor for five years in a row, and Trump wants to keep that streak going. And Trump's advisers will often remind him he needs Japan's support if he wants to effectively deal with his top strategic priority: China.
• After the US, China has the biggest influence over Japan. The health of the Japanese economy very much depends on the Chinese economy. As a result, Top Risk #3 (US-China breakdown) is high on the list of concerns for Japan. Trump's return to office will shatter the fragile stability in relations with China. He is likely to hit China with significant tariffs soon after his inauguration. He will also expect key allies and trading partners like Japan to side with the US in the expanding national security-related export controls against China, potentially at significant cost to Japan's economy. Moreover, the collapse in US-China relations will disrupt global supply chains and force a rewiring of trade flows, increasing costs for businesses worldwide, including Japanese firms.
• Although Top Risk #10 (Mexican standoff) focuses on flashpoints in US-Mexican relations over immigration, drugs, and trade, there is also a significant Japan nexus here. Trump has already threatened to impose a 25% tariff against Mexico. And there are likely to be fireworks in 2025 in the run-up to the 2026 review of the United States-Mexico-Canada Agreement, with a top concern of Trump being China's use of Mexico as a backdoor to sell goods into the US. Japanese automakers operate manufacturing plants in Mexico as a base for exporting to the US, and they risk getting pulled into this showdown. Higher tariffs or tighter rules-of-origin requirements on Mexican imports in the US will directly affect Japanese carmakers and their suppliers.
• With Trump as its leader, the US will be unwilling to exercise global leadership, as explained in Top Risk #1 (The G-Zero wins). Japan does not want to see the US abdicate its longstanding roles as world sheriff and champion of free trade, roles that have brought peace and prosperity to the country for decades. Although the US will resist leading in a way that Japan would want, the Red herring (Trump fails) should give Japan some solace. The US remains comparatively stronger than its adversaries. China is suffering its worst economic crisis in decades, Russia is in serious decline, and Iran is facing an existential threat. All of that redounds to Japan's benefit as a member of Team USA.
• From an early age, Japanese people learn that their island nation is bereft of national resources, always at risk because of its dependency on imported energy. That vulnerability makes Top Risk #5 (Russia still rogue) and Top Risk #6 (Iran on the ropes) important ones because of their implications for Japan's energy security. Japan is the world's second-largest LNG importer, and despite G7 sanctions, Japan still imports 9% of its LNG from Russia, mostly from the Sakhalin-2 facility. Even though Russia wants to maintain this deal with Japan, Russia's roguish behavior will have consequences. It will force Japan to consider other potential sources of the fuel (such as Alaska or western Canada) as political realities make Japan increasingly unwilling to rely on Russian LNG.
• Japan also imports 90% of its crude oil from the Middle East and has benefitted from the slump in oil prices in 2024. It does not want to see a broader US-Iran confrontation that would likely drive up prices. Iran's weakened state could tempt Trump to go for a knock-out punch against Iran to end its nuclear weapons ambitions. Japan would worry such provocative actions might simultaneously knock out its own economy, especially if Iran retaliated with strikes against energy infrastructure in the region or halted traffic through the Strait of Hormuz.