July Economic Outlook: Ripples and Prospects in the Global Economy Amid the US-Japan Trade Impasse

As July 2025 arrives, the deadlock in US-Japan trade negotiations has emerged as a pivotal factor shaping the global economic trajectory. The chain reactions it has triggered are prompting in-depth contemplation across various sectors regarding the economic outlook.

Since the new US administration implemented indiscriminate tariff hikes in April, Japan promptly initiated negotiations in response. However, after seven rounds of ministerial-level talks and one summit-level dialogue, significant differences between the two sides persist. Japan has made the removal of all US-imposed tariffs its central demand, as these tariffs have severely damaged its pillar industries such as steel and automobiles. Conversely, the US has adopted an unyielding stance on automobile tariffs, firmly insisting that this issue is not up for negotiation. Moreover, the Japanese negotiation team has struggled with poor communication and inefficiency when dealing with the US's "three-core" decision-making mechanism, consisting of the Treasury Secretary, Commerce Secretary, and Trade Representative. Coupled with the US's multi-front negotiation strategy, Japan has gradually lost its initiative, and its meticulously prepared economic security proposals have been sidelined, plunging the negotiations into a quagmire.

The dispute over automobile tariffs lies at the heart of this impasse. As a major automobile exporter, Japan shipped 1.37 million vehicles to the US in 2024, with exports of automobiles and parts amounting to 7.2 trillion yen, accounting for 34% of its total exports to the US. The automobile industry directly and indirectly supports over 5 million jobs in Japan. If the US imposes a 25% tariff on Japanese automobiles, the Japanese economy could suffer losses of up to 13 trillion yen, according to estimates by the Nikkei. This would have a cascading effect on upstream and downstream industries, threatening 5.58 million jobs. Meanwhile, the US, troubled by its substantial trade deficit in automobile imports from Japan, has been eager to expand its automobile exports to Japan. However, American cars struggle to gain traction in the Japanese market due to their large size, high fuel consumption, and relatively high prices. With neither side willing to back down, the US has repeatedly threatened to raise tariffs even further.

The agricultural sector is also fraught with contradictions. The US hopes that Japan will increase its purchases of American agricultural products significantly. However, due to domestic political pressures, Japan's Liberal Democratic Party refuses to sacrifice the interests of its agricultural, forestry, and fishery products to protect its industrial exports. Even in the face of a domestic "rice shortage," Japan firmly resists importing American rice, further exacerbating tensions between the two countries.

The deadlock in US-Japan trade has had a profound impact on the global automobile industry chain. Japanese automakers like Toyota and Honda, which have extensive operations in the US market, are grappling with soaring costs and shrinking profit margins, compelling them to reevaluate and restructure their global production layouts. If some production capacity is shifted to Southeast Asia, related parts suppliers will also need to adjust accordingly, leading to a major restructuring of the entire industry chain. Additionally, as a key global supplier of automobile components, Japan's parts suppliers are facing plummeting orders, inventory backlogs, and mounting survival pressures due to tariff fluctuations, especially for small and medium-sized enterprises.

The capital markets have reacted strongly to this situation. The Nikkei 225 index has been volatile, and share prices in the automobile sector have declined, reflecting investors' lowered expectations for the profitability of Japanese automakers. American automobile stocks have also performed poorly, as the market fears that trade frictions will disrupt the domestic US automobile market and erode consumer confidence. Expectations of rising prices in the international automobile market have suppressed potential purchasing demand, with consumers postponing their car-buying plans.

With the deadline for the suspension of US "reciprocal tariffs" approaching on July 9, the situation is becoming increasingly urgent. If the negotiations break down, Japan will face a significant increase in tariff rates. The Daiwa Institute of Research predicts that Japan's real GDP could decline by 0.9% over the next five years, triggering a series of reactions such as corporate layoffs and a contraction in consumer spending. From a global perspective, the instability in US-Japan trade will disrupt the global trade order. However, it also presents opportunities for enhanced economic cooperation within Asia and technological upgrades for enterprises. All parties need to closely monitor the progress of the negotiations and flexibly adapt to potential economic risks and opportunities.