During the U.S. occupation after the war, Yoshida headed the Japan Liberal Party and served as prime minister during May 1946–May 1947 and again during October 1948–December 1954. While he was in office, the Cold War heated up, altering U.S. policy toward Japan. President Harry S. Truman's administration recognized Japan's geopolitical importance in East Asia and changed its policies to revitalize Japan's economy, retain the use of Japanese military bases, and rearm Japan. Demand for Japanese rearmament became far stronger after the outbreak of the Korean War in June 1950.
In January 1951, Yoshida held a series of talks with U.S. diplomat John Foster Dulles, assigned to negotiate a peace treaty with Japan. Dulles wanted Japan to conclude a peace treaty as a U.S. ally and to maintain adequate armed forces. Yoshida agreed to an alliance with the United States but resisted Dulles's request for rearmament. Yoshida ultimately compromised with Dulles and secretly promised to create Japanese security forces. On 8 September 1951, Yoshida signed the San Francisco Peace Treaty. That same day, he also signed the United States–Japan Security Treaty.
In October 1952, Yoshida created the National Security Forces, which succeeded the National Police Reserve established in 1950. With continuous pressure from Washington to strengthen defense forces, he transformed the National Security Forces into the Self-Defense Forces in June 1954. A few months before this, the U.S.-Japan Mutual Defense Assistance Agreement was signed, strengthening military and economic ties between the two nations. By that time the Japanese economy was flourishing, as the Korean War had pumped billions of dollars into Japanese factories.
Yoshida's diplomacy put top priority on Japanese economic development, followed by retaining defense forces at the minimum level possible. Yoshida remained a strong supporter of the Guomindang (GMD, Nationalist) government on Taiwan. In domestic matters, he increased centralization of government.
The year 1954 saw the biggest challenge to his diplomacy. The Lucky Dragon incident in March caused massive protests against U.S. testing of nuclear weapons. The Lucky Dragon was a Japanese fishing vessel that had become caught in radioactive fallout after an American nuclear test in the Pacific Ocean.
Yoshida's political power and popularity decreased during this tumultuous year, and his premiership came to end in December 1954. He died on 20 October 1967 in Oiso, Kanagawa Prefecture, Japan.
Dower, John W. Empire and Aftermath: Yoshida Shigeru and the Japanese Experience, 1878–1954. Cambridge: Harvard University Press, 1979.; Finn, Richard B. Winners in Peace: MacArthur, Yoshida, and Postwar Japan. Berkeley: University of California Press 1992.; Hosoya, Chihiro, and A50 Editorial Committee, eds. Japan and the United States: Fifty Years of Partnership. Tokyo: Japan Times, 2001.; Schaller, Michael. Altered States: The United States and Japan since the Occupation. Oxford: Oxford University Press, 1997.