Japans Auto Exports Plummet Amid U.S. Tariff Dispute: Impact on Economy and Automakers

Japan's exports fell in May for the first time in eight months, as major automakers like Toyota were hit by sweeping U.S. tariffs. The failure of Tokyo to clinch a trade deal with Washington this week is likely to pile pressure on a fragile economy.

Prime Minister Shigeru Ishiba stated after the Group of Seven summit in Canada that his country had not reached a comprehensive tariff agreement with Washington due to ongoing disagreements between the two nations. He added that Japan and the U.S. "explored the possibility of a deal until the last minute."

Tokyo is scrambling to find ways to get Washington to exempt Japan's automakers from 25% automobile industry-specific tariffs, which are hurting the country's manufacturing sector. Japan also faces a 24% 'reciprocal' tariff rate starting on July 9 unless it can negotiate a deal with Washington.

The automobile sector accounted for about 28% of the total 21 trillion yen ($145 billion) worth of goods Japan exported to the U.S. last year. In May, exports to the U.S. slumped 11.1% from a year earlier, the largest monthly percentage decline since February 2021, dragged down by a 24.7% plunge in automobiles and a 19% fall in auto components. A stronger yen also helped reduce the value of shipments. Exports to China were down 8.8%.

However, in terms of volume, U.S.-bound automobile exports dipped just 3.9%, indicating that the biggest Japanese exporters were absorbing the tariff costs. "The value of automobile exports to the U.S. fell, but their volume did not drop that much," said Koki Akimoto, an economist at Daiwa Institute of Research. "This indicates Japanese automakers are effectively shouldering the tariff costs and not charging customers."

So far, major Japanese automakers have refrained from price increases in the U.S. to mitigate the tariff costs, except for Subaru (FUJHY) and Mitsubishi Motors (MMTOY, 7211.T). "They are buying time right now to see the course of Japan-U.S. trade negotiations," Akimoto said. The absence of price hikes could affect their profits, but their fiscal base is generally solid, he added.

While Japanese stocks and the yen showed little reaction to the data, shares of car companies have come under pressure this year due to concern about the tariff impact. Automakers and other transport companies are the second-worst performer this year among the Tokyo market's 33 sector sub-indices, down almost 12%. Only makers of precision equipment have fared worse.

Toyota (TM), the world's top-selling automaker, has estimated that tariffs likely sliced 180 billion yen from its profit in April and May alone. Honda (HMC) has said it expects a 650 billion yen hit to its earnings this year from tariffs in the U.S. and elsewhere.

The Japan May trade data provide one of the earliest indications of how U.S. President Donald Trump's tariffs are impacting countries and the global economy. China's data this week showed that its factory output grew 5