The lunacy of an arms race becomes its own justification. What you wind up with is a huge number of ungodly expensive ships, with 18", followed shortly by 20" and then, as soon as engine designers can get the SHP, 22" gun balanced designs. Somewhere around the second or third 18" gun ship the Japanese economy collapses, seeing this the Japanese decide to expand while they can and start the war in China five or six years earlier. By the time the G3 is being replaced by the H3 and N3 by the O3, the British economy crashes to a degree that makes the Depression look like a minor cash flow problem. The U.S. winds up with a pile of white elephants that are obsolete by 1940-41. Everyone loses, as is generally the case in arms races, but the U.S.economy is, by far the most able to handle the costs.
After I finished my own post, I reflected for a moment on what the advent of this 18" capital ship would mean once building began anew. 18" would be the new standard now for any big gun ship (might as well say
fast battleship at this point, battlecruiser becoming a pretty moot category by now) - I mean, assuming there *is* a battleship holiday. Which, as you rightly note, there should be, if the British have any sense. They can't match the U.S. in a naval arms race, and even a scaled down continuation of replacement construction under a juiced up WNT will be expensive - the
NelRods cost £7million each, almost three times what a
QE had cost just a decade before. It's nice to keep the yards and expertise up to date, but it will come at a steep price. And all that for weapon systems of increasingly dubious value for the money spent.
So the
King George Vs,
North Carolinas,
South Dakotas,
Richelieus and
Bismarcks (or whatever classes emerge at that time) will have to be 18", or something of similar striking power (hard to see the Germans settling for less than 420mm, which is basically their H41 class in all its 69,000 ton glory). Meanwhile, Japan will feel compelled to build to 20" for the
Yamatos - on its strategy, it has no choice. I can hear the Japanese economy wheezing to death now, I think. Britain
might well be able to afford all this, but the problem is that it would have to come at the expense of something
else, and in this case, I fear that will be (for starters) carriers and cruisers, and maybe even aircraft development. Which isn't going to be a helpful tradeoff come World War II.
No, if Britain is going to try any tweaking of the WNT, I think they'd be better off upping the tonnage allowance for aircraft carriers. But few were thinking along those lines back then.
The U.S. winds up with a pile of white elephants that are obsolete by 1940-41.
As is, they already 15 of those when war broke out in 1939.

Though I'm sure there are a few very old Marines who might beg to differ...