The auto industry in Japan is experiencing a significant upheaval due to a 25 % tariff on vehicles and auto parts imposed by the U.S. The move will hit large automakers such as Toyota, Honda, Mazda, and Subaru to the tune of more than $19 billion in this financial year. Smaller companies, closely connected to the chain supply, are coming under increased pressure.
Small and mid-sized businesses employ roughly two-thirds of Japan, many of which are related to the automotive industry. These firms are not only fighting tariffs but also the worldwide transition toward electric cars.
Subaru anticipates a 2.5 billion yen blow in the current fiscal year. CEO Atsushi Osaki hinted that the company might move its production to the U.S. to escape increased expenditures. Such action would expose local suppliers to vulnerability. Honda has already transferred production of the hybrid Civic to Alabama and halted its 11-billion-dollar EV supply chain plan in Canada.
Other automakers are also adjusting, including Mazda, which has stopped Canadian exports of an Alabama-built model, and Nissan, which has stopped U.S. orders of Mexican-built SUVs. Toyota is considering long-term expansion in the U.S. but has not yet made concrete steps.
Tariffs shake confidence as recession fears grow
The timing could not be worse for policymakers in Japan, who were just starting to witness sustainable growth. A so-called virtuous cycle of wage gains, stronger spending and moderate inflation was taking shape. That momentum is now at risk.
About two-thirds of the economists interviewed think that the tariffs might drive Japan into a recession. The core inflation has topped 2% over the last three years, enabling the Bank of Japan to roll back its ultra-easy monetary policy. However, a two-quarter decline in a row would qualify as a technical recession and threaten to disrupt the delicate process of normalization that the BOJ faces.
The monthly economic report issued by the government on Wednesday recognized the increasing risk. It reported a decrease in trade friction-related corporate profit, cautioning that sustained pressure may slow investment and hiring by the private sector.
The Bank of Japan, which had begun to tighten its ultra-loose monetary policy, is now thrown into new uncertainty. Over the last three years, core inflation has repeatedly exceeded 2%, yet the notes of the central bank meetings in April and May refer to tariffs 27 times. Policymakers cited threats to wage growth and supply chain stability as barriers to reaching sustained inflation.
The lack of continuous wage growth could make it difficult to help BOJ sustain its 2% inflation target. A renewed slowdown would push authorities to postpone or even turn around tightening schedules, stalling Japan’s economic normalization.
Japan pushes diplomatic route as G-7 summit nears
Prime Minister Shigeru Ishiba’s government is racing to contain the damage to the economy before national elections. A sixth trip to North America by trade negotiator Ryosei Akazawa is planned in the hope of reducing the tariffs ahead of the G-7 summit on June 15, which Ishiba may attend and have a direct meeting with President Trump.
Cabinet Secretary of Japan Yoshimasa Hayashi has also hailed the results of the latest U.S.-China trade negotiations, saying that a stable relationship between the two giants is essential to Japan. Hayashi said in a press briefing in Tokyo, “A stable relationship between China and the U.S. is paramount to Japan and the international community.”
The comments followed confirmation by China’s top trade envoy, Li Chenggang that a framework agreement had been reached between Washington and Beijing after talks in London. The talks were based on an earlier agreement made in Geneva on May 12 that temporarily suspended most tariffs and was aimed at unwinding steps taken since April, when President Trump triggered reciprocal tariffs on major trading partners.
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