Tokyo Struggles For Trade Deal As Japan’s Exports Tumble On Trump Tariffs

Prime Minister Shigeru Ishiba, speaking after the G7 summit in Canada, confirmed that negotiations with Washington had failed to yield a full tariff agreement.

Data from May revealed that total exports fell by 1.7 per cent year-on-year to 8.1 trillion yen.

Source : Freepik

Japan's export engine showed signs of strain in May, marking its first decline in eight months as trade tensions with the United States escalated. Major automakers, including industry giant Toyota, were particularly affected by new US tariffs, adding pressure on Japan's already fragile economic recovery.

Prime Minister Shigeru Ishiba, speaking after the G7 summit in Canada, confirmed that negotiations with Washington had failed to yield a full tariff agreement. “Japan and the US explored the possibility of a deal until the last minute,” he said, reported Reuters.

Despite Japan's efforts to secure an exemption for its automobile sector from the steep 25 per cent US tariffs, an agreement remains elusive. If negotiations falter, Japan could face an additional 24 per cent reciprocal tariff starting July 9. The automobile industry remains vital to Japan’s export economy, accounting for roughly 28 per cent of the 21 trillion yen ($145 billion) in goods shipped to the US last year.

Export Declines Signal Rising Headwinds

Data from May revealed that total exports fell by 1.7 per cent year-on-year to 8.1 trillion yen. This was better than market expectations of a 3.8 per cent decline but followed a 2 per cent increase in April.

Shipments to the US recorded a sharp 11.1 per cent fall, the steepest drop since February 2021. The automobile segment saw an even steeper value decline of 24.7 per cent, with auto components down 19 per cent. A stronger yen further eroded export value. Meanwhile, exports to China also dipped by 8.8 per cent.

Interestingly, the volume of vehicles shipped to the U.S. fell only 3.9 per cent, indicating that Japanese manufacturers are absorbing much of the tariff burden to maintain market share.

“The value of automobile exports to the US fell, but their volume did not drop that much,” noted Daiwa Institute of Research economist Koki Akimoto. “This indicates Japanese automakers are effectively shouldering the tariff costs and not charging customers.”

So far, major companies have refrained from raising prices in the US, with Mitsubishi Motors being a notable exception. Akimoto added, “They are buying time right now to see the course of Japan-US trade negotiations.”

Trade Deficit Grows as Global Slowdown Looms

While May’s export decline was not as severe as anticipated, the broader economic picture remains concerning. Imports shrank 7.7 per cent, surpassing expectations of a 6.7 per cent fall, resulting in a trade deficit of 637.6 billion yen, smaller than the forecasted 892.9 billion yen gap.

The looming threat of tariffs is unsettling for Japan’s manufacturing sector, already grappling with weak domestic consumption. The economy contracted in the first quarter of 2025, and further strain could complicate the Bank of Japan's cautious monetary policy approach.

The Japan Research Institute estimates that if all proposed US tariffs are implemented, exports to the US could decline by 20 per cent to 30 per cent, potentially slicing around 1 percentage point off Japan’s GDP.

Nonetheless, the smaller-than-feared drop in exports for May offers a glimmer of hope. The slight decline raises the chance of the economy avoiding a contraction in the April-June quarter, wrote Mizuho Securities economist Yuhi Kawano.

The ongoing uncertainty also influences the Bank of Japan’s monetary stance. On Tuesday, the BOJ left interest rates unchanged and opted to slow its balance sheet reduction, maintaining a cautious approach amidst the fragile recovery. With its balance sheet nearly matching the size of Japan’s economy, any policy tightening will require careful timing.

Meanwhile, China’s latest figures add to the sense of regional economic fragility, as factory output growth slowed to 5.8 per cent in May—its weakest pace in six months—and exports to the US plunged 34.5 per cent, the steepest drop since February 2020. Earlier in the year, many Asian exporters had accelerated shipments in anticipation of the new tariffs, temporarily boosting US-bound trade volumes.