Japan's Auto Industry Faces $19 Billion Hit From 25% U.S. Tariff

The auto industry in Japan is currently facing a significant disruption due to a 25% tariff on vehicles and auto parts imposed by the U.S. This tariff is expected to cost major automakers such as Toyota, Honda, Mazda, and Subaru over $19 billion in the current financial year. The impact is not limited to large corporations; smaller companies, which are integral to the supply chain, are also feeling the pressure.

Small and mid-sized businesses, which employ roughly two-thirds of Japan's workforce, are particularly vulnerable. These firms are not only grappling with the tariffs but also with the global shift towards electric vehicles. Subaru, for instance, anticipates a 2.5 billion yen loss in the current fiscal year. The company's CEO, Atsushi Osaki, has hinted at the possibility of moving production to the U.S. to avoid increased costs, a move that could leave local suppliers exposed.

Honda has already taken steps to mitigate the impact by transferring the production of the hybrid Civic to Alabama and halting its 11-billion-dollar EV supply chain plan in Canada. Mazda has stopped Canadian exports of an Alabama-built model, while Nissan has ceased U.S. orders of Mexican-built SUVs. Toyota is considering long-term expansion in the U.S., although no concrete steps have been taken yet.

The timing of these tariffs is particularly challenging for Japan's policymakers, who were just beginning to see signs of sustainable growth. A virtuous cycle of wage gains, stronger spending, and moderate inflation was taking shape, but this momentum is now at risk. About two-thirds of the economists interviewed believe that the tariffs could push Japan into a recession. Core inflation has topped 2% over the last three years, allowing the Bank of Japan to roll back its ultra-easy monetary policy. However, a two-quarter decline in a row would qualify as a technical recession and threaten to disrupt the delicate process of normalization that the BOJ faces.

The monthly economic report issued by the government recognized the increasing risk, reporting a decrease in trade friction-related corporate profit and cautioning that sustained pressure may slow investment and hiring by the private sector. The Bank of Japan, which had begun to tighten its ultra-loose monetary policy, is now facing new uncertainty. Over the last three years, core inflation has repeatedly exceeded 2%, yet the notes of the central bank meetings in April and May refer to tariffs 27 times. Policymakers cited threats to wage growth and supply chain stability as barriers to reaching sustained inflation.

The lack of continuous wage growth could make it difficult for the BOJ to sustain its 2% inflation target. A renewed slowdown would push authorities to postpone or even reverse tightening schedules, stalling Japan’s economic normalization. Prime Minister Shigeru Ishiba’s government is racing to contain the damage to the economy before national elections. A sixth trip to North America by trade negotiator Ryosei Akazawa is planned in the hope of reducing the tariffs ahead of the G-7 summit on June 15, which Ishiba may attend and have a direct meeting with President Trump.

Cabinet Secretary of Japan Yoshimasa Hayashi has also hailed the results of the latest U.S.-China trade negotiations, saying that a stable relationship between the two giants is essential to Japan. The comments followed confirmation by China’s top trade envoy that a framework agreement had been reached between Washington and Beijing after talks in London. The talks were based on an earlier agreement made in Geneva on May 12 that temporarily suspended most tariffs and was aimed at unwinding steps taken since April, when President Trump triggered reciprocal tariffs on major trading partners.