The Breakdown - Is the Trade War Actually a Capital War?

Episode Date: July 25, 2025

In today’s episode of The Breakdown, NLW dives deep into the evolving trade dynamics between the U.S. and Japan, asking whether the current trade war is really masking a larger capital or currency war. We explore the details behind a new $550 billion Japan-US investment vehicle, why Japan secured a lower tariff rate, and the controversy surrounding the deal’s legitimacy. NLW also unpacks the political upheaval in Japan, the long-term consequences of the BOJ’s extreme monetary policies, and whether the yen's behavior signals a shift in global financial strategy. Is this just brinksmanship, or a new era of macroeconomic warfare? Tune in for the full breakdown. Brought to you by: Grayscale offers more than 20 different crypto investment products. Explore the full suite at grayscale.com. Invest in your share of the future. Investing involves risk and possible loss of principal. To learn more, visit ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Grayscale.com⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ -- ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://www.grayscale.com//?utm_source=blockworks&utm_medium=paid-other&utm_campaign=brand&utm_id=&utm_term=&utm_content=audio-thebreakdown)⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/@TheBreakdownBW Subscribe to the newsletter: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://blockworks.co/newsletter/thebreakdown⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownBW

Welcome back to the breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Thursday, July 24th, and today we are talking macro. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the breakers discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Hello, friends. It's been a couple weeks since we dug deep into some macro, and that is what we are doing today. And I would say that if you wanted to take away a theme of this show or an exploration,

it's really a query underneath, which is this, is this trade war that we're experiencing, or sort of always flirting with right now, actually a capital or a currency war underneath? Yesterday, the administration announced a trade deal with Japan. Imports will be subject to a 15% baseline tariff rate. In exchange, Japan has agreed to increase their imports of U.S. Rice, open their markets to U.S. cars, as well as expand energy and defense purchases. The kicker and the reason Japan was able to secure a lower tariff rate was a novel new investment fund. The administration said that Japan will establish a $550 billion sovereign investment vehicle with funds, quote, targeted towards the revitalization of America's strategic industrial

base. They included examples like energy infrastructure, semiconductor manufacturing, mining, pharma, and shipbuilding. The White House claimed the U.S. will retain 90% of the profits from this investment. Treasury Secretary Scott Bessent praised the investment fund as the element that sealed the deal, stating, they got the 15% rate because they were willing to provide this innovative financing mechanism. They came to us with the idea of a Japan-U.S. partnership where they're going to provide equity, credit guarantees, and funding for major projects in the U.S. Now, it is beyond the scope of this show to actually dissect the quality of the deal itself. Twitter is filled with people arguing that

the deal isn't all that different from the status quo a year ago. Others are pounding the table that these aren't real trade deals that can be formalized and ratified by Congress, but merely handshake agreements with no longevity. Another very loud point is that Japanese cars will now have an advantage over domestic vehicles, with John Toomey, the executive director of the Coalition for a Prosperous America stating, it doesn't make sense to allow for unlimited vehicle imports at 15% while charging rates of 25% on auto parts and 50% on steel. Some are also pointing out that the concession of Japan to allow for more U.S. vehicle imports might be somewhat meaningless because the demand isn't there for gigantic American trucks. Indeed, the cynical would argue that the president is just

slapping together a deal with a big number attached. And sure enough, Trump declared, I just signed the largest trade deal in history. I think maybe the largest deal in history with Japan. It's a great deal for everybody. There's also a photo circulating of the trade deal terms printed out on a card sitting in front of Trump during a meeting with the Japanese delegation. Trump appears to have altered the terms by hand, increasing the tariff rate from 10 to 15 percent and bumping up the size of the investment fund from 400 billion to 500 billion. Andy LaPareire, the head of U.S. policy research at Piper Sandler suggested this is an amorphous deal that's difficult to pin down, noting that Japanese officials are describing it differently in their domestic press.

He noted that the Japanese government views the $550 billion figure as a cap rather than a commitment and includes government loan guarantees rather than only direct investment. He wrote, essentially, given that the Japanese believe they are being bullied into this commitment, they will almost certainly slow walk whatever investments they don't think are in their own economic self-interest. Still, the reason that analyzing the trade deal seems a little secondary, is that it comes in the context of a huge political and economic upheaval in Japan itself. Last weekend, the nation held their stand-alone vote for the Upper House of Parliament, the sort of equivalent of the Senate and Congress. The incumbent Liberal Democratic Party coalition lost the majority

in a landslide defeat. The party had lost control of the lower house in a separate election last fall, all of which makes Prime Minister Shigeru Ashiba a complete lame duck. Multiple credible local media outlets reported this week that Ashiba would resign at the end of August after completing the trade deal and presiding over the 80th anniversary of the nuclear bombs dropped on Japan. Shiba, however, told reporters on Wednesday that there's, quote, absolutely no truth to what is being reported. This all still leaves a huge question mark around how Japan will be governed moving forward. Unlike most Western democracies, Japan doesn't have a ton of experience with the peaceful transfer of power between different parties. The LDP has held the outright majority in at least one House of Parliament since the parties founding in 1955.

There have been brief periods where a prime minister from another party has been the head of state, but these have always been splinter factions of the LDP. Now the LDP seems set to rule as a minority government. Rather than a single opposition party gaining enough seats to take over, the balance of power in both chambers is held by a dozen or more parties that run the full gamut of political ideologies. There is no clear ruling coalition from either the LDP or their opponents. Now, I'm not a Japan expert, I'm not even really a Japan watcher,

so I will not even begin to attempt to predict what comes next. But one thing that we can confidently say is that at the moment, the Japanese political class is pretty weak. Today's episode of The Breakdown is brought to you exclusively by Grayscale. Grayscale is almost certainly a name you know. They've been offering exposure to crypto for over a decade now and offer over 20 different crypto investment products, ranging from single asset to diversified to thematic exposure to crypto and the broader crypto industry. They have long been innovators at the intersection of tradfai and crypto. And one of the benefits for a lot of us is that grayscale products are available right through your existing brokerage or IRA. Now, of course,

investing involves risk, including possible loss of principle. For more information and important disclosures, visit grayscale.com. Go to grayscale.com to explore their full suite of crypto investment products and invest in your share of the future. Indeed, even those that do professionally follow Japanese politics are at a bit of a loss for what comes next. William Chow, the Japan Chair at the Hudson Institute, said, What this means is we're sort of entering a period of speculation as to who's going to be the next leader. There's just a lot of speculation. Now, to quickly level set, the BOJ has been conducting what many would consider the most extreme

monetary policy experiment ever over the past 30-odd years. The central bank has been running continuous QE to purchase Japanese government bonds or JGBs in order to suppress interest rates in the hopes of stimulating growth. That policy even extended to buying domestic equities over the last decade. Beyond that, the BOJ has been conducting an overt policy of yield curve control, with the central bank explicitly targeting interest rates right out of the 10-year maturity. Some economists believe that this was reasonable given the long depression that fell over Japan after the boom of the 1980s and 1990s.

For others, they see it as an incredibly pointless and harmful policy that went on far too long given its pitiful results. Despite running the experimental policy for decades, growth never really returned, and Japan has had persistent low inflation and spurts of outright deflation. That was until 2022. Following the pandemic reopening, Japan experienced the same wave of inflation as the rest of the world. Inflation rates stored above 4% for the first time in over 40 years. This forced the BOJ to start unwinding their ultra-loose monetary policy, but it's not

at all clear that they have an exit ramp. Because of decades of QE, the BOJ owns more than half of the government debt. Japan has over 260% debt to GDP, which is more than twice that of the U.S. So, the BOJ is trying to unwind QE and sell bonds back into the private market, raise short-term policy rates and end yield curve control, sometimes all at once, sometimes switching between the policy goals, but all in the background of some very unstable monetary conditions. The latest shock was an auction of 40-year JGBs on Wednesday that recorded the weakest demand since 2011.

This is the latest in a series of weak auctions for long-term JGBs over the past few months. While the short end of the Japanese yield curve is still very low, the long end has been running away. JGB rates are still near zero out to the one-year maturity, but the 10-year yield has risen from 1 to 1.5% of the past year, with the 40-year yield now at 3.4% up from 2.4% last summer. Reports are attributing the usual narratives to rising bond yields and weak actions. Bond vigilante is concerned about government spending in fear of continued high inflation. For JGBs, you don't even really need to go that far. It could simply be that buying long-dated government debt is a horrible deal if yields keep rising.

The rule of thumb is that bond prices fall by 1% for every percentage point increase in yield. yields multiplied by the duration. So 40-year bond investors have suffered a 40% mark-to-market loss since last year. Some entities like issuers and pension funds are willing to bear that loss because they hold bonds to maturity. But by and large, it looks like the private market demand just isn't there to get these bonds off the BOJ's balance sheet, at least not until rates all of which puts the BOJ in a terrible bind. Inflation is still running above 3%. So conventional theory would have the central bank continue to hike rates. Most are expecting the next rate hike to come out in either October or January with the tariff deal taking the pressure

off for immediate action. There's still no good way out. BOJ is trying to normalize policy, but they're continuously running into weakness in the bond market or the currency that puts their plans on hold. Which gets me back to where we started. One of the really interesting lenses through which to view the current trade war is the idea that all trade wars are actually capital wars. Put forward by Michael Howell of cross-border capital, the concept is that the actual trade flows are a relatively minor element compared to the financial flows and currency agreements playing out in the background. The administration has given a few indications that this is also their own frame of thinking on macroeconomic rebalancing. In February, the president signed an executive

order regarding the America First Investment Policy. Among numerous other provisions, it accused Chinese state-affiliated investors of, quote, buying up critical American businesses and assets. Some view this policy as being about forcing excess foreign capital to fund new infrastructure or move into neutral assets like gold, rather than bidding up existing U.S. companies and infrastructure. The $550 billion Japanese investment vehicle could be a pilot of this kind of plan. Rather than buying U.S. equities with their dollar surpluses, the vehicle would be used at the direction of the U.S. to construct new infrastructure projects. The other big signpost was the writings of Council of Economic Advisors Chair Stephen Moran.

Moran has called for the Mar-A-Lago Accords, a currency agreement attached to a trade restructuring plan. That plan would see other nations agree to pump up their currencies while taking on the burden of tariffs in order to restructure the global economy. The textbook dynamic of tariffs would generally say the U.S. dollar should be rising as policy is put in place. In other words, trading partners will tend to devalue their own currencies in order to counteract tariffs. This isn't happening this time around. The yen strengthened by 10% against the dollar between inauguration day and liberation day when Trump unveiled the tariffs in the Rose Garden. Since then, the yen has been trading sideways and actually strengthened on the margins this week. An account called Endgame Macro laid out what they think might be going on,

writing, when Scott Besson, the U.S. Treasury Secretary visited Japan earlier this month, it wasn't just to attend a ceremonial event. He came to deliver a message. Behind closed doors, he likely told Japan's leadership to stop weakening the yen, scale back the BOJ's yield curve control, and agreed to a new trade framework or faced 25% auto tariffs, possible capital flight, and reduced access to dollar support mechanisms. That wasn't a warning, it was a line in the sand. Now, this theory all assumes a lot of 40 chess going on in the background. Certainly a bit of a stretch given how erratic the tariff policy has been. If the simplest explanation is usually the right one,

it's easily as likely that Trump just enjoys having leverage in negotiation and announcing deals with huge numbers attached as any sort of speculation that he's driving his administration towards a very specific type of rebalancing. But if private deals are being cut with global treasury departments and central banks, Besson doesn't actually need that much from the president. The huge leverage gained from Trump's brinksmanship is more than enough to tack currency and monetary policy accords onto trade deals. This is, of course, all very, very big

speculation, and we have no idea what sort of side deals and discussions are going on. But it bears consideration and is something certainly worth watching that maybe not every element of the trade deals is when push comes to shove public knowledge. And that's going to do it for today's breakdown. Appreciate you listening, as always, and until next time, be safe and take care of each other. Peace.