Today’s podcast was inspired by the Treasury Department’s intervention to shore up the Yen on or around July 30th. It’s a rare Trump administration action that I entirely approve of. Sure, it probably could have been done in a way that was more polite to the Europeans. It’s unlikely that such an intervention would have been necessary without the nihilistic chaos of Trump’s management of the planet, most obviously in the Persian Gulf. But bailing out the Yen is the least we could do for a country that always backs our plays, no matter how stupid they are.
In today’s episode, Ruairi and I discuss the mildly absurd mechanisms of currency intervention, and assess the Yen rescue operation’s probability of success. (If you want to know more about the Yen bailout specifically, go listen to Brad Setser on Odd Lots, most of our analysis is cribbed from there.) We use the currency issue as a jumping off point for a wide ranging discussion of the tremendously undervalued US Japanese relationship. We’ll miss it when its gone.
You can listen to the episode here, or you can read on for my take on what most commentators miss about the value of the US Japan relationship.
It’s Not The Military
We’ve been conditioned to discuss everything in geopolitics in a military lens. This is deeply wrong. The true sources of US power are economic, financial, and institutional, and Japan is a key force multiplier in all those realms. Too often the US-Japan relationship is boiled down to the size or supposed prowess of the Japanese Self Defense Forces. This is missing the forest for one particularly small and dead tree. Stupid failed wars, and plans to do new ones are all the US government wants to focus on, so we hear a lot about the Japanese military.
Japan remains the fifth largest economy in the world, and the third largest in Asia. It was only recently surpassed by China and India, despite being home to 122 million people, rather than over a billion. It is a wealthy, fully developed country, without needing to band together with a bunch of former rivals to preserve that position like Europe does.
Unlike China and India, Japan has been a world economic leader for well over a century now. It has a depth of expertise and relationships that make it an international trade and finance powerhouse. This sophistication and breadth is often deployed in service to US aims, even when the US aims are injurious to Japanese security, as with the sanctions on Russian petroleum from 2022 on.
Unlike the United States, Japan doesn’t have that absurdly complete freedom from consequences. It’s experienced horrific lows in the game of geopolitics and knows that careful management is necessary to avoid such lows in the future. This gives Japan’s policymakers a wisdom and a sense of care that the US government will probably never have.
America’s Greatest Geopolitical Gift
Thanks to first the Soviet Union, and now China, all of Japan’s resources and wisdom are put in service of the United States. This may not seem like the wisest choice for Japan, but the closer juggernauts are always likely to be more frightening. There’s probably a limit to US stupidity that Japan will put up with, but we haven’t found it yet. Not even with Donald Trump.
Japan has known its interests lie with the United States for quite some time. In the podcast episode, I suggest that the Japanese have shaped their domestic politics to be accommodating to US interests. I don’t see this discussed much elsewhere, but it seems likely to me that the Premiership of Sanae Takaichi is an attempt to placate US hawkishness, and Donald Trump specifically.
Prime Minister Takaichi was selected by the Liberal Democratic Party (LDP) as the new prime minister in October 2025. The LDP has been in power for all but a few years since 1955, and is not in one of its more vulnerable periods. The party can be chameleon-like, with many different ideological factions. Takaichi was maybe the hardest right direction they could have gone. She is also a protege of Abe Shinzo, the late Prime Minister who had a famously good relationship with the First Trump administration.
The two biggest trends in US politics over the past ten years have been Trump’s insane ego, and the complete unchaining of US war-mongering that Trump & Biden’s incompetence has allowed. Takaichi is a politician tailored to flatter both of those dynamics. Trump has rewarded Japan for this gift by blowing up its main source of energy through the Iran war.
Washington, DC war mongers love Takaichi. One of the more absurd ideas that I have heard, one that her positions sometimes support, is that Japan has a more hawkish take on Taiwan than the US does. Takaichi provided fuel to this idea by sparking a not yet fully resolved rupture with China in November 2025, her first month in office. There seems to be a conscious DC effort to use Takaichi’s faction to build up an Israel style veto on any US peace-making in East Asia. I believe that’s an absurd misreading of Japan.
Japan’s government has been led by a conservative, hawkish political party, the LDP, for like 65 out of the past 70 years. Yet, despite constant LDP efforts, Japan remains a constitutionally pacifist country. As ever, Washington, DC is projecting its own priorities out into the world. Japan is eager to cater to US government priorities. That does not mean they are insane enough to think they can defend Taiwan militarily. I believe a more sane and peace oriented US establishment and President would quickly be reflected in Japanese politics.
Am I suggesting that Japan doesn’t take the threat of China seriously?
God No.
I’m saying that focusing on Taiwan and trying to start World War III are not serious avenues for confronting China.
The Real China Fight
As long ago as 2016, much of the world was ready to sign on to a new trade architecture that would limit China’s exports. Trump blew it up. Thanks to Trump’s complete neglect of this arena, the situation has now evolved into a full blown panic. Talk of the “Second China Shock” suffuses the halls of power from California to Europe, and that language is filtering into less developed countries as well.
China is no longer just exporting cheap electronics. It’s building on its dominance of the basics to march up the value chain. Its devouring of automobile industry market share is only the most obvious example. If Chinese exports are allowed to continue to grow at the current pace, in a decade’s time nothing will be manufactured anywhere else.
This dynamic has very much reached the “If Something Can’t Go On Forever, It Won’t” phase. It’s only the chaotic stupidity of Trump and Biden’s world management that has allowed the situation to get as out of control as it is today. Some kind of “Plaza Accord” style limitation of Chinese exports will be necessary.
The 1985 Plaza Accord was imposed on Japan when its export prowess became dangerous to manufacturing in the rest of the developed world. China is not as dependent on the US as Japan was in 1985. But it may be as dependent on Japan + US + Europe. As I always emphasize, the military aspect is not the important one, it’s economics that tell.
Japan’s cooperation with any sort of “China Plaza” implementation will be absolutely essential. This is the real fight against China. We’ll need a functional Japanese Yen to carry it out.
You can listen to today’s episode on Spotify, or you can watch it on YouTube below…
Some nice lines in this one.