Japan is preparing for intensified pressure from the US administration regarding defense spending, payments for US troops, and monetary policy as Washington approaches the November 2026 midterm elections. Tokyo and Washington are expected to negotiate a new five-year agreement covering Japan’s financial support for US forces beginning in fiscal 2027.

Rising Troop Support Costs

Japan contributed more than 200 billion yen ($1.25 billion) in fiscal 2026. A senior Defense Ministry official stated that Tokyo should be prepared for demands to increase this amount. "We should be prepared for some degree of demand for an increase," the official said.

During his first term, the Trump administration sought to more than quadruple Japan’s contribution, according to former US national security adviser John Bolton. The current administration continues to argue that US allies should shoulder more of their defense costs.

Defense Spending and Currency Policy

Washington has urged Japan to raise defense spending to 3.5% of GDP, compared with Tokyo’s current target of 2%. This pressure extends to currency policy, with the US and Japan recently coordinating yen-buying intervention as the Japanese currency weakened.

The Bank of Japan’s next policy meeting is scheduled for Sept. 17-18, with markets watching for another rate hike.

Diplomatic Shifts in Asia

President Donald Trump has directed aides to explore a possible summit with North Korean leader Kim Jong Un as early as fall 2026. This could potentially occur during Trump’s November Asia trip for the APEC summit in China. Trump described recent exchanges with Kim as "very positive" after receiving a response to his outreach.

Additionally, Trump ordered the Pentagon to substantially scale back US-South Korea military exercises, arguing they were costly and sent an "inappropriate and hostile" signal to North Korea. He stated that his approach aims to reduce tensions and make the situation safer.

U.S. Treasury Secretary Bessent has weighed in on Japan's inflation dynamics, attributing the recent uptick to a combination of a weak yen and elevated energy prices. His remarks offer a perspective on the interplay between currency valuation, commodity costs, and consumer price pressures in Japan.

Key Observations on Japan's Inflation Drivers

According to Bessent, the weakness in the yen has been a contributing factor to the rise in Japan's inflation. A depreciating currency typically raises the cost of imports, including energy, which in turn feeds into broader price levels across the economy.

The following points summarize the key factors and outlook highlighted by Bessent:

• Weak yen: Identified as a primary driver behind the inflation uptick in Japan
• Energy prices: Elevated energy costs cited as a concurrent factor amplifying inflationary pressures
• Easing of energy prices: Expected to contribute to a moderation in Japan's inflation
• Fading of excess yen weakness: Anticipated to reduce import cost pressures
• Virtuous cycle: Bessent indicated that the combination of these easing factors could allow Japan and the yen to enter a more stable and self-reinforcing economic trajectory

Bessent's Assessment at a Glance

Bessent's remarks underscore the significance of external price pressures—particularly energy costs and currency dynamics—in shaping Japan's current inflationary environment. His comments suggest that a normalization in these two areas could be instrumental in stabilizing Japan's price levels and supporting the yen going forward.