Japan: US trade deal in politically difficult times

In a time of domestic political turmoil, Japan has recently struck a trade agreement with the US, averting a possible trade conflict. The US will impose tariffs of 15 per cent on imports from Japan. US President Donald Trump had originally threatened tariffs of 25 per cent. In return, Japan will invest in the US and facilitate access to its markets for American manufacturers.

Japan’s important automotive industry is central to the negotiations

The core of the negotiations concerned the reduction of automobile tariffs. Cars account for more than a quarter of Japanese exports to the US and are therefore the most important export sector. This was precisely what Donald Trump found so objectionable, as Japan imports significantly fewer US cars. The president therefore introduced tariffs of 25 percent on Japanese cars in April. With the deal, car tariffs have now been reduced to 15 per cent. In addition, the US has decided not to impose an upper limit on imports of Japanese cars.

In return, Japan has pledged to invest up to USD 550bn in the US. This will take the form of loans and guarantees from Japanese state banks and other government agencies. The Japan Investment America Initiative is intended to promote investment in sectors such as semiconductors, AI technologies, pharmaceuticals, steel, shipbuilding and cars. US companies will also be given easier access to the Japanese market. For example, Japan will abolish additional safety checks for US vehicles, which US representatives considered a trade barrier.

Japanese exports of steel and aluminium, which are subject to a separate US tariff of 50 per cent, were not included in the agreement. Regulations on exchange rates, a previous point of contention, are also not part of the deal.

Japan’s stock market reacts positively to the averted trade war

The agreement came as a relief in Japan. The US is Japan’s most important export market, so a trade conflict would have hit Japan’s economy hard. Japan is the US’s fifth-largest trading partner. Bilateral trade volume amounted to almost USD 230bn in 2024, with a trade surplus for Japan of almost USD 70bn. The Japanese Nikkei index rose to its highest level in a year after the trade deal was announced. Automobile stocks naturally benefited particularly strongly. Shares in car manufacturers Honda and Toyota rose by over 10 per cent after the agreement was announced.

Prime Minister wants to continue coalition as a minority government

For Japan’s ruling party, the deal comes at a difficult time, as it had to enter the negotiations politically weakened after a lost election – just a few days before the agreement was concluded, Prime Minister Shigeru Ishiba’s coalition government lost its majority in the upper house elections. His Liberal Democratic Party (LDP) and its coalition partner Komeito won 47 seats in the final results, falling short of the 50 seats needed for a majority. The coalition had already lost its majority in the lower house in October.

According to polls, many voters were dissatisfied with the government’s response to rising consumer prices. Although Japan’s core inflation dropped to 3.3 per cent in June, it is still above the central bank’s target of 2 per cent. The ruling party has so far rejected tax cuts demanded by voters and opposition parties to ease price pressures, out of consideration for the bond markets and the country’s high debt.

After the lost election, Ishiba announced that he would continue his work with a minority government. Although Japanese media reported on the prime minister’s plans to resign after the election, Ishiba denied such plans after the deal with the US was finalised. Regardless, his government faces a difficult task: he is the first prime minister since World War II to govern without a majority in both houses of parliament. Experts also fear that the prime minister could fall victim to a party rebellion or a vote of no confidence by the opposition.

Europe and Japan want to strengthen partnership

Internationally, however, Ishiba appears to have won allies for his country. According to experts, the trade deal could make Japan an important partner for the US in Asia. Europe also wants to collaborate more closely with Japan in order to jointly ward off pressure against the two economies, EU Commission President Ursula von der Leyen said last week after an EU-Japan summit in Tokyo, which Ishiba also attended. Japan is seen as a role model in Europe because it has built up raw material reserves to become more independent of political pressure from other countries.

The EU and Japan are striving to strengthen economic security, said von der Leyen. This is aimed at China, for one, which has imposed restrictions on exports of rare earths that are needed by both Japanese and European industry. “We will also work more closely together to counter economic coercion and combat unfair trade practices,” von der Leyen noted. “We believe in global competitiveness that should benefit everyone.” The EU and Japan also agreed to strengthen the defence industry and to start talks on a data security and privacy agreement.

 

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