Top Risks is Eurasia Group's annual forecast of the political risks that are most likely to play out over the course of the year. This year's report was published on 8 January 2024.
IMPLICATIONS FOR Japan
Eurasia Group's Top Risks 2024 report provides insight into what to expect from major global players (such as the US, China, and Russia) as well as from big trends (such as inflation, AI, and critical minerals).
Some of these risks will affect Japan more than others. In particular, risks #1 (The United States vs. itself) and #10 (Risky business) stand out for Japan, given its close economic and security relationship with the United States. But so too does risk #6 (No China recovery), because China is Japan's top trading partner. Other risks related to inflation and Taiwan could likewise have significant implications for Japan as it begins the Year of the Dragon—often considered the most auspicious year on the zodiac calendar.
Here are some of the key takeaways from Eurasia Group's Top Risks 2024 report for Japan. For the full list of top ten global risks, please see the report here.
- Risk #1 (The United States vs. itself) is also Japan's top risk. Ever since Commodore Matthew Perry arrived at Tokyo Bay in 1853, the US has loomed large in the minds of the Japanese. And in the postwar era, no country wields as much influence over Japan's economy, politics, national security, and pop culture as the US does. That said, along with such influence comes enhanced risk for Japan when the US political system goes haywire.
- Tokyo's political and government centers of Nagata-cho and Kasumigaseki are already abuzz over the 2024 US presidential election. That chatter is about whether there will be a sequel to Donald Trump's presidency. Former prime minister Abe Shinzo was masterful at flattering Trump—with gifts of golden golf clubs and a nomination for the Nobel Peace Prize. But of course, Abe is gone, so the burning question in Tokyo is whether Prime Minister Kishida Fumio (or a future leader) could manage Trump as well as Abe did. There is today a consensus that Japan lacks a “Trump whisperer” to rival Abe. And that makes Tokyo very, very antsy.
- It is notable that even Abe could not stop Trump from slapping tariffs on Japanese steel and aluminum imports. The US still has a wide goods trade deficit with Japan ($68 billion in 2022) and that would draw Trump's ire in a second administration because he abhors trade deficits. Japan could be the target of tariffs again, along with other countries. And whereas Japan is now moving toward increasing its defense spending to 2% of GDP by 2027, Tokyo's steps would probably not be enough to satisfy Trump, who would pressure Japan to spend even more. Conversely, however, Japan might have some avenues to influence Trump. He would likely take a very hard line on China and could find useful a critical ally such as Japan to successfully implement his hardline policy.
- Japan is the largest source of FDI in the US (more than $700 billion in 2022). Also, US-based Japanese manufacturing firms employ the highest number of US workers, at more than half a million. As a result, this puts the #10 risk for 2024 (Risky business) near the top for Japan. Japanese corporations, which operate all over the US, will confront policies and regulations that vastly differ from state to state (such as in California and Texas). That will be difficult to navigate this year because of political polarization. After the US-Japan trade wars of the 1980s and 1990s, Japanese firms—with support from their government—rapidly ramped up their investments into the US to avoid becoming a target of tariffs. That was a wise move at the time. But one downside now is that it risks putting Japanese firms more squarely in the crossfire of US domestic politics.
- After the US, China is the country with the biggest influence over Japan's economy and national security. As mentioned, the vim of the Japanese economy depends on the Chinese economy. So risk #6 (No China recovery) has large implications for Japan. A corollary of China no longer being a major driver of world economic growth is that Chinese demand for Japanese exports will remain weak in 2024. Although decoupling from the Chinese economy is not an option for Japan, Japanese firms and investors will increasingly be forced this year to move investments from China to more appealing emerging markets.
- One piece of good news for Japan is that a US-China crisis is unlikely in 2024—Top Risks identifies this as a red herring. As for Japan's relations with China, Kishida's meeting in November with President Xi Jinping yielded results that should help stabilize the relationship into 2024. That said, the year could start off with a bang if pro-independence candidate William Lai is elected Taiwan's president on 13 January. This is the other election of most intense interest to Japan, after the US election. As the Top Risks report notes, Lai is one of “America's dangerous friends” (along with Volodymyr Zelensky and Benjamin Netanyahu) who could drag the country into expanded conflicts in 2024. A Lai victory would undeniably raise the level of economic coercion and military fireworks from China against Taiwan. But even if Lai wins and other challenges arise (such as close military encounters between the US and China in the region), US-China ties are likely to remain relatively stable. The two sides will carefully manage their relationship, even as it slowly deteriorates.
- Top Risks 2024 identifies the ongoing global inflation shock as a major factor that will remain a political and economic drag on many countries. Because Chinese growth—once a safety net against global economic downturns—will remain weak, the world will experience low growth. That risk has big implications for the Japanese economy, which already struggles to reach solid growth because of its declining population. Although inflation has been relatively low compared to other countries, Japanese residents are for the first time in decades seeing price levels rise, particularly because of the high cost of food and energy imports.
- Worsening inflation contributed to Kishida's low approval ratings in the second half of 2023, making the Japanese public grumpy over his handling of the economy. The Bank of Japan is poised to raise interest rates, already taking baby steps in that direction last year. But such a move would also have a substantial political impact because it could reduce economic growth and make it harder for Japan to service its gargantuan debt pile. Financing that debt with higher interest rates might crowd out Kishida's other spending priorities such as increasing defense spending. The prospect of weak global growth makes the title of risk #8 (No room for error) a particularly apt description of the challenge for Japan's economic policymakers in 2024.
- Lastly, North Korea's emerging security partnership with Russia and other rogue states has important implications for Japan. North Korea's missile testing in 2023, after a record-setting pace of launches in 2022, was subdued. However, North Korea's cozying up to Russia—outlined in risk #5 (Axis of rogues)—will concern Japan. Russia is also a neighbor that has become more of a threat to Japan, after Tokyo stood with the West in applying tough economic sanctions against Moscow. In response, Russia has ratcheted up its military exercises around Japan. The prospect of Russia boosting North Korea's military and reconnaissance capabilities is not one that Japan will welcome in 2024.