Xi Rebukes Japan Remilitarization in Heated Trump Summit Exchange
0h ago|4 min readStandard
Fazen Markets Editorial Desk
Collective editorial team · methodology
us-china-relationsjapan-defense
Fazen Markets Editorial Desk
Collective editorial team · methodology
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Chinese President Xi Jinping delivered a heated critique of Japan’s defense policies during a summit with former President Donald Trump on May 24, 2026. The exchange, reported by the Financial Times, centered on Japan's increased military spending and strategic alignment with the United States. The confrontation highlights the fragile state of great-power relations in the Asia-Pacific region. It underscores the persistent security dilemma that continues to influence global capital flows and defense sector valuations. This event marks a significant escalation in diplomatic rhetoric between the world's two largest economies and a key US ally.
The summit between Xi and Trump was the first high-level meeting between Chinese and US leaders since the 2024 US election. The last major public diplomatic confrontation over Japan’s military occurred in 2013, when China established an Air Defense Identification Zone over the East China Sea. Tensions have simmered for decades, rooted in historical grievances and conflicting territorial claims in the South and East China Seas.
The current macro backdrop is defined by elevated global bond yields and persistent inflationary pressures. The US 10-year Treasury yield trades near 4.5%, reflecting market uncertainty about the path of fiscal policy and geopolitical risk premiums. Japan’s own yield curve control policy remains a focal point for global fixed-income markets.
The immediate catalyst for Xi’s remarks was Japan’s parliamentary approval of a record 7.95 trillion yen defense budget for the 2026 fiscal year. This budget represents a 15% year-on-year increase and fulfills Japan's commitment to double defense spending to 2% of GDP by 2027. The timing of the summit, early in the new US administration, provided a platform for China to signal its firm opposition to this strategic shift.
Japan’s newly approved defense budget of 7.95 trillion yen ($51 billion USD) marks a definitive break from decades of pacifist spending. The budget allocation represents approximately 1.3% of Japan's GDP, a significant step toward the NATO-standard 2% target. Japan’s defense expenditure has grown at a compound annual growth rate of 9% since 2022.
Comparative defense spending reveals the scale of the regional arms dynamic. The United States plans to spend $886 billion on defense in 2026. China’s official military budget is estimated at 1.67 trillion yuan ($230 billion), though many analysts believe actual spending is considerably higher. The Japanese budget includes $8 billion for long-range standoff missiles capable of striking targets in China, a key point of contention.
| Metric | Japan (2026) | Year-on-Year Change |
|---|---|---|
| Defense Budget | 7.95T JPY | +15.0% |
| Budget as % of GDP | 1.3% | +0.2 pts |
| Allocation for Missile Procurement | 1.2T JPY | +42% |
Japan’s Topix Index aerospace and defense sub-index has outperformed the broader market, rising 22% year-to-date versus the Topix’s 10% gain. Major Japanese defense contractors like Mitsubishi Heavy Industries (7011.T) have seen order books swell by over 30% in the last fiscal year.
The immediate market impact favors global defense and aerospace equities. US defense primes like Lockheed Martin (LMT) and Northrop Grumman (NOC), which supply technology to Japan, stand to benefit from increased procurement. Japanese industrial giants Mitsubishi Heavy Industries and Kawasaki Heavy Industries (7012.T) are direct beneficiaries of domestic spending. Cybersecurity firms with government contracts in Japan and the US may also see increased demand as tensions elevate digital threats.
Conversely, industries reliant on stable China-Japan supply chains face headwinds. Automotive manufacturers with significant production in China for export, such as Toyota (7203.T) and Nissan (7201.T), are exposed to potential retaliatory trade measures or consumer boycotts. The semiconductor sector, dependent on delicate cross-strait logistics, remains highly sensitive to any disruption in regional stability. A sustained risk-off sentiment could strengthen the Japanese yen as a safe-haven currency, negatively impacting the export-heavy Nikkei index.
A key counter-argument is that heightened rhetoric does not necessarily equate to immediate kinetic or economic conflict. Both China and Japan have strong mutual economic interests, with bilateral trade exceeding $300 billion annually. This interdependence may act as a brake on escalation. Institutional flow data indicates a recent rotation into defense ETFs and out of Chinese consumer discretionary stocks listed in Hong Kong. Hedge fund net short positions on the Chinese yuan have increased to their highest level in six months.
Market participants should monitor Japan’s next National Defense Program Guidelines, scheduled for release in Q4 2026. These guidelines will outline the specific capabilities Japan intends to develop, offering concrete data on future procurement. The upcoming NATO summit in July 2026 will be critical for assessing the depth of Japan’s integration with Western defense alliances, a major irritant for Beijing.
Key technical levels for the USD/JPY currency pair include 152.00, a level previously defended by Japanese monetary authorities, and 155.00, which would represent a fresh multi-decade high. A breach of 155.00 could trigger official intervention. For the iShares MSCI Japan ETF (EWJ), the 200-day moving average near $68.50 serves as a crucial support level; a sustained break below could signal a deeper correction driven by geopolitical risk.
The trajectory of US foreign policy under the new administration will be the primary driver. Further public endorsements of Japan’s military expansion by US officials will likely provoke additional condemnations from China. Any joint US-Japan military exercises near Taiwan or in the South China Sea will serve as immediate catalysts for renewed volatility.
Japan’s defense spending averaged around 1% of GDP for decades, consistent with its post-war pacifist constitution. The push to 2% of GDP represents a doubling of its relative fiscal commitment and is the most significant shift in Japanese security policy since the Cold War. This change is driven by perceived threats from North Korea’s missile program and China’s military modernization and assertiveness in the region.
Japanese corporations have substantial exposure to China, with over $100 billion in cumulative direct investment. In past periods of diplomatic friction, Chinese consumers have boycotted Japanese brands, impacting automakers and retailers. More severe measures could include heightened regulatory scrutiny, customs delays, or the cancellation of government contracts, directly affecting revenue and operational stability for firms like Uniqlo owner Fast Retailing and industrial robot maker Fanuc.
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