Japan’s Export Decline Amid U.S. Tariffs

By Makiko Yamazaki and Tim Kelly

TOKYO (Reuters) – Japan’s exports fell in May for the first time in eight months as major automakers like Toyota were impacted by extensive U.S. tariffs. The failure to secure a trade deal at the recent Group of Seven summit adds pressure to Japan’s fragile economy.

Prime Minister Shigeru Ishiba stated that Japan did not reach a comprehensive tariff agreement with Washington due to ongoing disagreements, despite efforts to negotiate until the last moment.

Japan is trying to convince the U.S. to exempt its automakers from a 25% tariff on the automobile sector, which is harming manufacturing. Japan faces an impending 24% reciprocal tariff starting July 9 unless a deal is reached. The automobile sector made up about 28% of Japan’s total $145 billion exports to the U.S. last year.

May exports dropped 1.7% year-on-year to 8.1 trillion yen, better than the anticipated 3.8% decrease following a 2% rise in April. Exports to the U.S. fell 11.1%, the biggest monthly decline since February 2021, driven by a nearly 25% decrease in automobile exports and a 19% decline in auto components. Additionally, a stronger yen contributed to lower shipment values. Exports to China also fell by 8.8%.

Despite the value drop, U.S.-bound auto export volumes decreased only 3.9%, suggesting that Japanese automakers have absorbed tariff costs without raising prices, except for Subaru and Mitsubishi Motors, to assess the impact of trade negotiations.

Japanese automakers are currently under pressure due to evolving tariff implications. Toyota may have lost 180 billion yen in profits from tariffs in April and May, while Honda expects a 650 billion yen hit this year.

Japan’s May trade data underscore the immediate effects of U.S. tariffs and signal challenges for global trade. China’s factory output grew by only 5.8% in May, and its exports to the U.S. plummeted by 34.5%. Tariffs prompted many Asian exporters, including Japan, to increase early shipments, resulting in inflated export levels.

In May, Japan’s imports fell by 7.7%, which was better than the anticipated decrease. Consequently, Japan recorded a trade deficit of 637.6 billion yen, less than the forecast deficit.

Economic Impact

The strain from U.S. tariffs may further pressure Japan’s sluggish economy, which recently contracted due to weak private consumption. However, the smaller-than-expected decline in May exports raises hopes for avoiding contraction in the upcoming quarter, according to economist Yuhi Kawano.

The tariffs complicate the Bank of Japan’s objectives of raising interest rates and managing its considerable balance sheet. The BOJ decided to keep interest rates steady and slow the rate of its balance sheet reduction, preferring a cautious approach in removing prolonged stimulus measures.

If all proposed tariffs against Japan were enacted, exports to the U.S. could fall by 20%-30%, potentially reducing Japan’s GDP by 1 percentage point, according to estimates.

($1 = 145.3200 yen)