The Impact of Tariffs on Japan’s Economy
By Takuya Nishimura, APP Senior Fellow, Former Editorial Writer for The Hokkaido Shimbun
You can find his blog, J Update here.
May 12, 2025. Special to Asia Policy Point
As U.S. President Donald Trump enters bilateral tariff negotiations with several countries, his tariffs have already begun to negatively affect Japan’s economy. Some business sectors had already realized profit and growth losses from the slowdown of Japan’s economy. The Shigeru Ishiba administration believes that, as a close ally of the United States, it can negotiate some exceptions to the punishing tariffs. This is far from certain.
The Bank of Japan has revised its estimate of the growth of Japan’s economy in FY2025. “Japan’s economic growth is likely to moderate, as trade and other policies in each jurisdiction [other countries] lead to a slowdown in overseas economies and to a decline in domestic corporate profits and other factors,” says the bank’s Outlook for Economic Activity and Prices in April. The outlook identifies Japan’s evolving trade situation and developments in import prices as risks to economic activity.
Toyota Motor Corporation published its FY2025 consolidated financial results on May 8. According to its estimation, net income from April 2025 to March 2026 will decline by 3.1 trillion yen ($21 billion), or 34.9 percent. Toyota has already taken into account declines of 180 billion yen in April and May 2025 that have resulted from Trump’s tariff policy, as well as an annual 745 billion yen reduction caused by the fluctuation of foreign exchange rates.
Nippon Steel estimates its net income between April 2025 and March 2026 will be 200 billion yen, a 42.9 percent decline from the previous fiscal year. “The U.S. administration’s tariff policy is becoming increasingly uncertain day by day and is beginning to have a major impact on the global economy. As a result, the trend toward favoring domestic production is accelerating, and it is expected to have a significant impact on the domestic and overseas steel industry, including an indirect impact,” according to Nippon Steel’s consolidated financial results for FY2024.
The Trump administration imposed a 25 percent tariff on foreign steel and aluminum in March. In April, it imposed another 25 percent tariff on imported cars. The Shigeru Ishiba administration quickly sought to negotiate reductions in these tariffs. Japan’s top negotiator, Ryosei Akazawa, announced that the talks were focused on the expansion of bilateral trade, non-tariff barriers, and economic security.
While Japan has been spending time trying to set the agenda, the United Kingdom reached a deal with the U.S. to reduce tariffs on UK products. The tariff on 100,000 UK cars will be reduced from 27.5 percent to 10 percent, and steel and aluminum imports will be tariff-free. On Monday, May 12, the U.S. agreed with China to cut the 145 percent tariff on Chinese goods to 30 percent for 90 days.
The Trump administration clearly is seeking deals with countries, regardless of whether they are allies or foes. Japan was stunned by the indifference of Trump administration to their alliance and shared values of democracy and free markets, as seen in the U.S. intent to exclude the new tariffs on automobiles, steel, and aluminum from negotiations with Japan.
Trump’s tariffs caused the Japanese yen to appreciate against the U.S. dollar. The appreciation will itself raise the cost of Japan’s goods sold in the U.S., although the precise change in the exchange rate has varied. The yen rose from 155 yen per dollar at the time of Trump’s inauguration in January to a high of 140 yen in April. As of the close of business Monday, May 12, in the U.S., the rate was approximately 148 yen to the dollar.
Despite pressure from the Trump Administration to ease monetary policy, the Federal Open Market Committee of the Federal Reserve Board made no change to the current federal funds rate of 4¼ to 4½ percent at its May meeting, which concluded on May 7. As long as U.S. monetary policy does not reduce the interest gap between the U.S. and Japan, there should be little impact on the yen.
However, the announcement of even a 90-day deal between the U.S. and China devalued the yen. At the close of the market on Friday, the Japanese yen was at approximately 145 yen to the dollar. At the U.S. close on Monday, it was approximately 148 yen to the dollar.
A cheap yen hikes the price of imported goods in Japan. According to the Monthly Labour Survey in March by the Ministry of Health, Labour and Welfare, the real wage of workers in Japan has dropped for three consecutive months. Workers’ wages have still not caught up with price inflation.
To minimize the negative impact of Trump’s tariffs in the coming Upper House election, the Ishiba administration plans to deliver an economic stimulus package. However, the leaders of the Liberal Democratic Party are reluctant to include a consumption tax cut or a cash distribution in the party’s campaign platform.
If Japan falls behind other countries in finishing bilateral tariff deals, the Ishiba administration will be unable to reverse the downward trend in its approval rating. The latest poll of NHK showed a 33 percent approval rating, down 2 percentage points from the previous month. The Trump administration's tough line toward Japan is having a negative effect on Japanese politics.