Japan’s exports fell in May for the first time in eight months as major automakers like Toyota were affected by sweeping U.S. tariffs. The country’s inability to finalize a trade deal with the U.S. adds further pressure to its already fragile economy.

Prime Minister Shigeru Ishiba remarked after the G7 Summit in Canada on June 17 that Japan has yet to reach a comprehensive tariff agreement with the U.S. due to lingering disagreements. He added that Japan and the U.S. "have probed the possibility of a deal up to the last minute." Tokyo is working to secure a U.S. waiver for Japanese car exports, which face a proposed 25% tariff—a blow to its automotive sector. Without a deal by July 9, Japan may also face a 24% retaliatory tariff on its goods.

Japan’s auto sector accounts for approximately 28% of the ¥21 trillion (USD 145 billion) in exports to the U.S. last year.

Exports Slide 1.7% in May

Government data show that total exports dropped 1.7% year-over-year in May, to ¥8.1 trillion, despite analysts expecting a 3.8% decline. April had seen a 2% gain.

Exports to the U.S. fell 11.1% year-over-year in May, the steepest monthly drop since February 2021, led by 24.7% decline in automobile shipments and a 19% drop in auto parts, compounded by a stronger yen lowering export value. Exports to China fell 8.8%.

By volume, auto exports to the U.S. declined only 3.9%, indicating that exporters absorbed tariff costs rather than passing them on to buyers. Economist Koki Akimoto of Daiwa Institute observed, “Automobile export value declined, but volumes barely fell. This shows Japanese automakers are bearing tariff costs without charging customers.”

So far, Japanese automakers—except Subaru and Mitsubishi Motors—have not raised U.S. prices to offset tariffs. “They are buying time to see how Japan-U.S. trade talks develop,” Akimoto added. “Not raising prices may hurt profits, but their financial foundations are generally sound.”

Market Response and Broader Economic Impact

Japan’s equities and yen showed little reaction to the trade data. May trade data provides one of the earliest signs of how President Trump’s tariffs may increasingly affect global economies.

In related data from China this week, industrial output rose only 5.8% year-over-year in May, the slowest pace in six months, and exports to the U.S. dropped 34.5%, the sharpest since February 2020.

The threat of upcoming tariffs spurred Japanese and other Asian exporters to boost early-year shipments to the U.S., contributing to earlier gains.

May imports declined 7.7% year-over-year, compared to expectations for a 6.7% decline. As a result, Japan recorded a trade deficit of ¥637.6 billion for May, versus a projected ¥892.9 billion.

Tariff Threats Mount on Japan’s Economy

U.S. tariffs pose a significant headwind to Japan’s growth. Weakening private consumption triggered a contraction in Japan’s Q1 GDP, the first decline in a year.

Yuhi Kawano, economist at Mizuho Securities, noted that the smaller-than-expected May export drop suggests underlying export strength, improving the odds Japan can avoid a recession in Q2–Q4.

However, the threat of tariffs complicates the Bank of Japan’s efforts to exit its ultra-loose monetary policies. The BOJ held rates steady on June 17 and slowed its balance sheet reduction schedule next year, signaling caution as it unwinds decades of stimulus equivalent to nearly the size of Japan’s GDP.

According to the Japan Research Institute, if all threatened U.S. tariffs take effect, Japan’s exports to the U.S. could fall by 20–30%. Some economists estimate such tariffs could shave around 1 percentage point off Japan’s GDP.

(Cre: BBC)