TOKYO — Japan’s exports fell in May for the first time in eight months as big automakers such as Toyota were hit by sweeping US tariffs, and the failure of Tokyo to clinch a trade deal this week are likely to pile pressure on a fragile economy.
Prime Minister Shigeru Ishiba said after the Group of Seven summit in Canada on Tuesday his country had not reached a comprehensive tariff agreement with Washington as some disagreements persisted between the two nations.
Japan and the US “explored the possibility of a deal until the last minute,” he said.
Tokyo is scrambling to find ways to get Washington to exempt Japan’s automakers from 25% automobile industry-specific tariffs, which are hurting the country’s manufacturing sector. Japan also faces a 24% “reciprocal” tariff rate starting on July 9 unless it can negotiate a deal with Washington.
Automobile exports
Japan's automobile sector accounted for about 28% of the total ¥21-trillion worth of goods the Asian country exported to the US last year.
Its total exports in May dropped 1.7% year on year by value to ¥8.1-trillion, government data showed, smaller than a median market forecast for a 3.8% decrease and after a 2% rise in April.
Exports to the US slumped 11.1% last month from a year earlier, the largest monthly percentage decline since February 2021, dragged down by a 24.7% plunge in automobiles and a 19% fall in auto components, while a stronger yen also helped reduce the value of shipments. Exports to China were down 8.8%.
In terms of volume, however, US-bound automobile exports dipped just 3.9%, indicating that the biggest Japanese exporters were absorbing the tariff costs.
“The value of automobile exports to the US fell, but their volume did not drop that much,” Daiwa Institute of Research economist Koki Akimoto said. “This indicates Japanese automakers are effectively shouldering the tariff costs and not charging customers.”
Trade negotiations
So far major Japanese automakers have refrained from price increases in the US to mitigate the tariff costs, except for Subaru and Mitsubishi Motors.
“They are buying time right now to see the course of Japan-US trade negotiations,” Akimoto said. The absence of price hikes could affect their profits, but their financial base is generally solid, he said.
While Japanese stocks and the yen showed little reaction to the data, shares of car companies have come under pressure this year due to concern about the tariff effect.
Automakers and other transport companies are the second-worst performer this year among the Tokyo market’s 33 sector sub-indices, down almost 12%. Only makers of precision equipment have fared worse.
Toyota, the world’s top-selling automaker, has estimated that tariffs likely sliced ¥180bn from its profit in April and May alone. Honda has said it expects a ¥650bn hit to its earnings this year from tariffs in the US and elsewhere.
Global economy
Japan’s May trade data provide one of the earliest indications of how US President Donald Trump's tariffs are affecting countries and the global economy.
China’s data showed this week that the country’s factory output grew 5.8% in May year on year, the slowest pace in six months. And its outbound shipments to the US plunged 34.5%, the sharpest drop since February 2020.
The impending tariffs had driven companies in Japan and other major Asian exporters to ramp up shipments earlier this year, inflating levels of US-bound exports during that period.
The Japan data showed imports dropped 7.7% in May from a year earlier, compared with market forecasts for a 6.7% decrease.
As a result, Japan ran a trade deficit of ¥637.6bn last month, compared with the forecast of a deficit of ¥892.9bn.
Private consumption
The hit from US tariffs could add pressure on Japan's lacklustre economy. Subdued private consumption already caused the world’s fourth-largest economy to shrink in January-March, the first contraction in a year.
However, the smaller-than-expected drop in May shipments suggests that Japan’s export driver has not stumbled, slightly raising the chance of the economy avoiding a contraction in the April-June quarter, Yuhi Kawano, economist at Mizuho Securities, wrote in a report.
The tariff woes, though, complicate the Bank of Japan’s task of raising still-low interest rates and reducing a balance sheet that has ballooned to roughly the size of Japan’s economy.
The Bank kept interest rates steady on Tuesday and decided to decelerate the pace of its balance sheet drawdown next year, signalling its preference to move cautiously in removing remnants of its massive, decade-long stimulus.
According to an estimate by the Japan Research Institute, if all the threatened tariff measures against Japan were to take effect, US-bound exports will fall 20%-30%.
Some economists said those duties could shave about one percentage point off the nation’s GDP. Reuters
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