The Japanese economy under the shadow of tariffs: Where will it go?

This year, in the second year of Trump's return to the White House, the tariffs imposed by the United States on Japanese auto parts have soared from the original 2.5% to 15%. Under the impact of these tariffs imposed by the United States, Japanese auto part suppliers located in the upstream of the industrial chain have mostly found it difficult to smoothly pass on the additional costs to customers. Among the 43 major suppliers surveyed, 32 companies stated that they were affected. Among these surveyed enterprises, 32 stated that the 15% tariff policy of the United States had led to an increase in their costs. Although this tax rate has been reduced from the initial 25%, it is still higher than the 2.5% level before President Trump's second term. Among these 32 affected enterprises, 13 (approximately 40%) claimed that they had passed on the additional costs from tariffs to downstream customers. However, many enterprises failed to achieve cost transmission. 12 companies stated that they were considering price increase plans, and 5 auto part manufacturers had submitted price increase applications or their applications had been approved. But as of the time of the investigation, they had not officially raised prices.

Under the influence of the tariff policy, the development of Japanese auto parts has had multi-dimensional impacts on the economy. Firstly, there is the impact on imports and exports. The high tariffs imposed by the United States on Japanese auto parts have led to the obstruction of Japanese auto parts exports, a reduction in related enterprise orders, and an increase in operational pressure. It is estimated that the auto tariffs alone could lead to a reduction of 12 billion US dollars in Japan's exports to the United States, and affect upstream and downstream enterprises in the Japanese domestic supply chain. The Japanese auto parts industry is highly dependent on the global supply chain, and the tariff policy may lead to an increase in the risk of supply chain disruption. For example, some suppliers producing plastic parts for Honda and Nissan stated that if the tariffs continue, the company will be forced to significantly reduce its profit margin, and the worst-case scenario is that layoffs will be inevitable. Auto parts are one of the important goods exported by Japan to the United States, and their export contraction will further expand Japan's trade deficit with the United States, having a negative impact on Japan's overall trade balance.

Secondly, it affects the profits of enterprises. The tariff policy has led to an increase in the export costs of Japanese auto parts companies, severely squeezing their profit margins. Due to the impact of the US tariff policy, the seven major Japanese automakers expect a combined reduction in operating profits of approximately 2.67 trillion yen in the fiscal year 2025. The reduction in profit scale is equivalent to more than 30% of the total operating profits of the seven automakers in the previous fiscal year. Among them, Toyota is expected to reduce profits by 1.4 trillion yen, Honda by 450 billion yen, and Nissan by up to 300 billion yen . The auto parts giant Denso Kogyo expects that its operating profit in the fiscal year ending March 2026 will shrink to 205 billion yen (about 1.43 billion US dollars), a 31.7% reduction from the original expectation of 300 billion yen. Among them, the tariff impact is expected to reduce its operating profit by 20 billion yen. Facing the pressure of declining profits, Japanese auto parts companies may reduce investment scale, delay technological upgrades and capacity expansion plans, thereby affecting the long-term development of the industry.

Thirdly, it has an impact on the expectations for economic growth. Due to the impact of the US tariff policy, the Cabinet Office of Japan has lowered its forecast for economic growth in the fiscal year 2025 from 1.2% in January to 0.7%. This indicates that the tariff policy has had a significant drag on Japan's economic growth. Economists warn that as the tariff policy continues to be implemented, the Japanese automotive industry may suffer a severe blow, and it may bring recession risks to the Japanese economy. Some analysis points out that GDP may again shrink in the third quarter, with an annualized decline of 0.6%.

In conclusion, the tariff policy has had various and significant impacts on the Japanese economy. Overall, the Japanese economy is currently facing severe challenges brought about by the tariff policy, and its future development trend remains to be further observed.