Japan finds itself in an increasingly tense situation as President Donald Trump pushes for a new trade agreement before new U.S. tariffs take effect on July 9. Without a compelling offer to Washington, Tokyo risks losing a key trade deal with the United States.
🚗 Auto Industry at the Center of the Talks
A major point of contention is Japan’s auto industry, which makes up around 10% of the country’s GDP and employs nearly 8% of its workforce. Japan is trying to avoid Trump's harsh tariffs by offering U.S. investments, cooperation in shipbuilding, and increased purchases of American semiconductors and LNG. The goal is to reduce the planned 25% tariff to a more manageable 10%.
However, Tokyo faces tough choices – one potential offer includes opening up the Japanese rice market, a move that could cost the ruling party support among rural voters just ahead of national elections on July 20.
🛑 Japan’s Friendly Approach Meets U.S. Pressure
Chief negotiator Ryosei Akazawa has made seven trips to Washington in recent months to keep the talks alive. Yet, despite his efforts, he often returns without confirmed meetings. On his latest trip, he only managed two phone calls with Commerce Secretary Lutnick and couldn't meet with Treasury Secretary Bessent at all.
Meanwhile, President Trump has publicly criticized Japan for not buying enough American cars or importing U.S. rice, even claiming Japan has a “massive rice shortage.”
⚖️ Tokyo’s Strategy Faces Domestic Resistance
Japan’s government is caught between U.S. demands and pre-election domestic politics. According to analysts, the administration is in a bind – give in too much, and it risks alienating voters; push back too hard, and it could damage relations with a critical ally.
Agriculture Minister Shinjiro Koizumi supports a deal that maximizes Japan’s benefits but has made it clear that farmers won’t be sacrificed just to protect car exports.
📉 Business Mood Steady – For Now
According to a new Bank of Japan survey, business sentiment remains surprisingly stable. The index for large manufacturers rose to +13 in June, beating forecasts. Still, companies lowered their profit outlooks, anticipating that tariffs could take a toll in the near future.
Non-manufacturing sentiment dipped slightly from +35 to +34, with firms citing rising labor costs and weaker tourist spending as concerns. Some companies reported passing higher costs to consumers, while others said sluggish sales and wage hikes hurt revenues.
📦 Trump Ready to Act Alone
President Trump has indicated he’s ready to skip negotiations altogether and simply send countries a letter with new tariff rates. When asked if such a letter would be announced publicly, Akazawa smiled and said: “If it happens, I’m sure President Trump will post it on Truth Social.”
🔮 Economy Resilient, But the Clock Is Ticking
Despite uncertainty, Japan’s economy remains relatively strong. GDP contracted by 0.2% year-over-year in Q1, largely due to weak consumer spending. But businesses have held steady so far. Still, with tariffs set to rise to 25% on cars and 24% on other goods after July 9, exporters face serious new challenges.
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