Amid the intensifying trade friction between the U.S. and China, the Japanese government is having difficulty managing its trade policy. The U.S. is taking issue with its trade deficit with Japan, so it may also put pressure on Japan to open its markets. Japan may face certain tough situations depending on the demands from the U.S.

So far, Japan has contemplated taking to the WTO, together with the U.S. and the EU, the issue of China’s forcing foreign companies to transfer technology. It was aiming at forming an “encirclement” of China to prod it to take remedial measures, and “the U.S. had been quite positive about this idea,” according to a government source. However, the U.S. has now gone ahead and slapped unilateral punitive tariffs on China.

The U.S. took this case to the WTO on March 23, and it is believed to be continuing to be look for ways to collaborate with Japan and Europe. However, a senior Ministry of Economy, Trade, and Industry (METI) official indicated that “unless Japan is exempted from the import restrictions on steel and aluminum products, it will not be able to support the U.S.” Japan and the U.S. will find working in tandem difficult under the present circumstances.

The import restrictions on steel and aluminum products are expected to be discussed at the Japan-U.S. summit meetings on April 17-18. However, the government is wary: “If Japan asks to be exempted, it may be asked to start negotiations on a bilateral free trade agreement (FTA) in return,” according to the above METI official. This might prevent Japan from making an explicit request for exemption.

According to estimates by Mizuho Research Institute, if U.S.-China trade shrinks by 20%, this will translate into a 0.9% reduction in the U.S.’s GDP and a 3.2% decrease in China’s GDP. The Japanese economy will also be seriously affected by the confrontation of the top two economies in the world.

If yen buying and dollar selling accelerate due to wariness about the intensifying trade friction because the yen is considered a safer asset, this may further spur the appreciation of the yen and fall in stock prices. An economist expressed the concern that “this may adversely affect business results and cut short the trend toward wage increases.”

The question for Japan is how to make President Donald Trump understand the necessity of free trade at the Japan-U.S. summit.