Japan at a crossroads

Japan is at the crossroads, many Japanese believe, facing major challenges including: the energy crisis caused by the Iran war, a slow recovery from a thirty-year economic downturn, conflicts with China and an increasingly uneasy relationship with the United States.

Several analysts, who spoke off the record, described a number of challenges facing Japan.

Iran War Impact

The US-Israel war with Iran has spiked oil and gas prices in Japan and poses an inflationary threat to the economy. A Reuters report says Japan relies on the Middle East for around 95% of its oil supplies and 11% of its liquefied natural gas imports, with around 70% and 6% respectively coming via the Strait of Hormuz, which ​is effectively closed due to the Iran war.

As a result, on March 16th, Japan began to release oil from its reserves to alleviate supply concerns that had grown amid the U.S.-Israel war with Iran and stabilize the distribution of petroleum products. According to a Japan Times report, Japan is initially releasing 15 days' worth of reserves held by the private sector, with a month's worth of state-held oil to follow. The release by Japan for its domestic market comes ahead of a planned coordinated release by the 32 countries of the International Energy Agency, including Japan. The Japanese government will reduce the mandatory 70-day reserve requirement for oil refiners and trading companies under Japan's oil stockpiling law to 55 days' worth, allowing them to draw down their existing stocks for use.

Uneasy US Relationship

President Trump managed to mock Japan and embarrass Japanese Prime Minister Sanae Takaichi during her visit to Washington. At a news conference on March 19th with Takaichi present, Trump was asked why he did not warn Japan and other US allies about his plan to go to war with Iran. Trump’s response was to joke that Japan did not warn the United States before it attacked the U.S. Navy at Pearl Harbor in 1941. The remarks go a long way to explain why Japan and other U.S. allies did not respond to the U.S. appeal for naval support to open up the Strait of Hormuz.

Here is what President Trump said in front of Prime Minister Takaichi: “… We wanted a surprise. Who knows better about surprise than Japan, OK? Why didn’t you tell me about Pearl Harbor? …You believe in surprise, I think, much more so than us.”

On March 13th, the Japan Times reported: “As the US continues to pour weapons into the Middle East for military operations against Iran, current and former defense officials in Asia are growing concerned that more American firepower will be shifted over time if the war drags on. And even if fighting wraps up soon, they warned that depleted stockpiles of munitions could also take years to replace, leaving Taiwan and other places vulnerable.”

What is particularly incomprehensible for the Japanese is that the United States is nearly self-sufficient in oil and gas and has strong economic and national security interests in the Pacific and East Asia. And yet it risks this to go to war with Iran, which poses no direct threat to the United States.

China and Taiwan

Japan’s Prime Minister Sanae Takaichi has said that Japan would defend Taiwan against a Chinese attack and is determined to upgrade its military capabilities. In so doing, Takaichi provided hope that Japan would emerge as Taiwan’s champion and a bulwark for democracy in Asia, standing up to what Takaichi described as China’s policy of “coercion.”

An analysis in the Taipei Times entitled ‘Is Takaichi’s win good for Taiwan?’ argues that Japan may be seeking to improve its relations with China and tone down support for Taiwan following Takaichi’s LDP party’s landslide electoral victory in February.

Takaichi urged that Japan stand up to China as a campaign issue.

The authors of the report- Huynh Tam Sang, a doctoral student at National Tsing Hua University and Truong Tuan Kiet, a master’s student at National Tsing Hua University - wrote that Takaichi’s strong anti-China stance might be brief: “Within hours of her electoral triumph, Takaichi signaled a more conciliatory stance toward Beijing by affirming that Japan ‘is open to dialogue with China.’ In her remarks, Takaichi underlined that she would seek ‘understanding’ from neighboring countries before considering a visit to the Yasukuni Shrine, a site deemed controversial for leaders in China and South Korea. … China still has considerable leverage to pressure Japan … Beijing prohibited the export of dual-use items (including seven types of rare earths and related materials) to Japanese entities that it claimed supplied Japan’s military….”

Nevertheless, the authors note that Taiwan’s independence has become a priority for Japan: “mounting tensions with China would likely consolidate domestic support for Takaichi’s security ambitions. The Taiwan issue has emerged as a serious concern. First, this stems from Taiwan’s vulnerable and strategic location — sitting at the intersection of the East China Sea and the South China Sea. Second, the importance of the democratic nation is embedded in the deep-seated fear that if China unifies with Taiwan, the balance of power in East Asia could shift irreversibly.”

The big unknown is whether the United States would support Taiwan and Japan in a conflict with China.

Trump has shown a growing willingness to placate Russia’s invasion of Ukraine and China’s dominance in Asia.

Also, President Trump “has been discussing US arms sales to the island with Chinese leaders, in what appears to be a clear violation of longstanding American policy in the region,” according to the Taiwan Strait Risk Report, which analyzes national security threats to Taiwan.

So, President Trump has not emerged as a strong supporter of Taiwan’s independence, and his treatment of Prime Minister Takaichi during her recent trip to Washington is not a good sign for Japan, either.

Tariffs and Japan

Japan continues to face uncertainty in its trade relations with the United States.

Japan has been trying to negotiate some exemptions to the imposition of 15% tariffs, but so far without success, one Japanese business leader said. He added that he thought Japan had an agreement with the United States on this matter, but so far, the United States has not responded, although discussions continue.

In September 2025, the Trump administration announced that it had imposed 15% tariffs on Japanese exports to the United States: “ Implementing The United States–Japan Agreement – The White House: Under the Agreement, the United States will apply a baseline 15 percent tariff on nearly all Japanese imports entering the United States, alongside separate sector-specific treatment for automobiles and automobile parts; aerospace products; generic pharmaceuticals; and natural resources that are not naturally available or produced in the United States. This new tariff framework, combined with expanded United States exports and investment-driven production, will help reduce the trade deficit with Japan and restore greater balance to the overall United States trade position.

Impact of Japan’s Downturn

Japan is still recovering from economic downturn and deflation that began in the early 1990s: “Japanese companies were traumatized after the bubble burst on the economy in the early 1990s and lasted for thirty years,” according to one analyst.

Similarly, Seiichi Suzuki, President, All Japan Dockworkers Union (Zenkowen), told AJOT that when he went to work on the docks forty years ago, Japanese workers’ pay and benefits were much better than they are today: “We have lost ground in the last forty years since I joined the union. The effect of deflation over the last thirty years has caused Japanese wages and prices to decline. Also, over that period, manufacturing shifted away from Japan and to Korea, Southeast Asia, and China.”

Ports such as Busan (South Korea), Singapore, and Shanghai have gained ground on the Japanese ports because more manufacturing has moved there and away from Japan, and this has impacted Japanese port volumes and jobs, Suzuki added.

Japan’s Domestic Investment Strategy

Sayuri Shirai, a professor at Keio University, fellow at the Asian Development Bank Institute, and former member of the Bank of Japan Policy Board, supports the Japanese government’s new domestic investment agenda.

Writing in the Japan Times on March 18th, Shirai said: “Japan faces a severe shortage of highly skilled professionals in areas such as artificial intelligence, cloud computing, and cybersecurity. This shortage is becoming a binding constraint on productivity growth. Companies cannot digitalize, automate or upgrade their operations if the supply of engineers, data scientists and cybersecurity specialists remains limited. Domestic education and training are important, but with a shrinking labor force, relying solely on domestic supply will not be sufficient. Japan will need both large-scale reskilling of its existing workforce and a more strategic approach to attracting highly skilled foreign professionals in sectors where shortages are most acute.”

As a result, the Japanese government has emphasized digital transformation, economic security, and AI-related initiatives — themes that the current administration of Sanae Takaichi has framed as part of its agenda for “growth investment” and “crisis-management investment.” However, the scale and focus of these efforts will need to be strengthened. Public investment should be more clearly concentrated in areas that expand Japan’s digital capacity, while policies to secure highly skilled talent must advance at the same time.”

Japanese businesses that support the government’s initiatives say Japan needs a major domestic investment program to make up for the years of economic stagnation: “This is why Japan is at a crossroads facing huge deficits in domestic investments that caused economic stagnation.”

AI is a major investment priority, but Japanese companies are mindful of the loss of jobs. However, as a result of an aging population and workforce, the deployment of robots and robotics is necessary to mitigate age-related workforce declines.

The hope is that Japan has the means and resolve to invest in reviving its global competitiveness and focus on domestic economic revitalization.

The question is whether this effort comes too late to turn Japan’s economic fortunes around.