Recent US-Japan Trade Deal and Plaza Accord

Muhammad Zamir Assadi

In a moment steeped in déjà vu, US President Donald Trump on July 22 unveiled a sweeping new trade pact with Japan. At first glance, the deal appeared pragmatic. Japanese imports will face a baseline 15% tariff, down from the initially threatened 25%, in exchange for a Japanese pledge to invest $550 billion into the American economy. The White House framed it as “the single largest foreign investment commitment ever secured by any country.”

But history casts a long shadow. The agreement may appear cooperative, but its contours echo a familiar pattern. For Tokyo, the memory of the 1985 Plaza Accord looms large, when Japan bowed to US pressure to revalue the yen. What followed were twin asset bubbles, a financial crash, and what came to be known as “two lost decades.”

Is the new agreement another Plaza Accord in disguise?

A Tariff Lower Than Threatened and Higher Than Comfortable

Luckily, Tokyo may have dodged the 25% tariff bullet, but the 15% levy might still hit hard. According to the Office of the United States Trade Representative (USTR), US goods imports from Japan totaled $148.2 billion in 2024. A flat 15% tariff amounts to an annual $22.23 billion trade penalty, a cost that will be shouldered by Japanese firms, US consumers, or both.

Quoting data from Japan’s Ministry of Finance, the United States remained Japan’s largest export destination in 2024, absorbing 20 percent of total goods exports in yen terms. Prior to the recent US-Japan trade agreement, Japanese exports to the US, particularly in automobiles and electronics, historically faced low or zero tariffs, with passenger cars generally taxed at just 2.5%. The new deal makes the burden especially acute for key export sectors like automobiles and electronics, which constitute the bulk of Japan’s exports to the US and are particularly sensitive to tariffs.

Yet the broader economic backdrop makes this even more precarious. According to IMF’s World Economic Outlook Update (July 29, 2025), Japan’s economy contracted at an annualized rate of 0.2 percent, as soft private consumption and weak net exports weighed on growth. While robust private investment helped cushion the decline, it wasn’t enough to reverse the trend. The IMF projects a GDP growth of just 0.7 percent for Japan in 2025, reflecting subdued domestic demand, labor shortages, and a fragile external environment.

In such conditions, adding punitive tariffs on Japan’s most important export market seems like a direct blow rather than a strategic lever.

Strategic Investment or a Cost of Peace?

The second pillar of the deal, the $550 billion investment from Japan into the US, has been celebrated in Washington as proof of American industrial resurgence. The White House stated the investment would be spread across sectors including energy, semiconductors, minerals, pharmaceuticals, and shipbuilding, though precise allocation remains vague. It “will generate hundreds of thousands of U.S. jobs, expand domestic manufacturing, and secure American prosperity for generations,” reads the statement.

Where to get the money then? Think about the number! The scale of the pledge is extraordinary. In 2024, Japan’s net foreign direct investment (FDI) totaled $211 billion, a 17.1% year-on-year increase and the highest level since records began in 1996. This new US-Japan agreement implies nearly tripling that pace, concentrated in a single country.

To put this number in perspective: Japan’s defense budget for fiscal year 2025, approved in December 2024, is 8.7 trillion Japanese yen, or about $55.1 billion. The latest investment pledge is about ten times that amount, an imbalance that has not gone unnoticed in Tokyo.

Sound familiar? In the wake of the Plaza Accord, Japan ramped up foreign direct investment in the US, famously acquiring real estate like Rockefeller Center and Pebble Beach. After the Plaza Accord era, cumulative Japanese foreign direct investment into the US ballooned, reflecting a sharp acceleration in capital outflows. Many of these deals soured during the asset deflation of the 1990s.

Today’s $550 billion price tag again raises a question: is this economic alignment or fiscal appeasement?

Ghosts of the Plaza

Led by G5 finance ministers and central bankers, a meeting took place in New York on September 22, 1985, where the Plaza Accord was signed to address the overvalued US dollar and curb the US trade deficit by depreciating it, especially against the Japanese yen and Deutsche Mark.

Quickly, the Japanese yen was pushed from around JPY 240 per USD in 1985 to under JPY 120 per USD by 1988. A stronger yen crushed Japan’s export competitiveness. In response, the Bank of Japan adopted ultra-loose monetary policy, fueling bubbles in real estate and equities.

Yielding devastating consequences, Japan’s economy - once a symbol of unstoppable growth - soared in the 1980s with average annual GDP growth of 3.89%. But the momentum faded in the 1990s. Between 1991 and 2003, growth slowed to just 1.14% per year. Meanwhile, land prices declined steadily throughout the decade, plunging by a staggering 70% by 2001. The Plaza Accord was not the sole reason for Japan’s economic downturn, but it undoubtedly dealt a heavy blow.

So what does the current deal risk triggering?

While no currency manipulation is on the table, the combined burden of new tariffs and forced capital outflows may again weaken Japan’s long-term competitiveness. Japanese corporates are already saddled with rising energy costs, labor shortages, and aging infrastructure. Forced redirection of capital overseas, in a low-growth environment, might limit domestic reinvestment.

Yielding Quietly, Paying Loudly

Trump’s 2025 trade pact may differ from the Plaza Accord in form, but not in essence. Japan plays along, again, hoping to secure stability through sacrifice. But the costs, be it higher export taxes, enormous capital outflows, and economic distraction, are not abstract. They are measurable, historical, and, in many ways, familiar.

The economic pain may not be immediate. But when you start “cooperating” with a bear, you don’t negotiate the hug; you brace for the squeeze.