Japan’s economy is impacted by global Trump tariffs and slower US and China growth, leading to a revised 2025 growth forecast of 0.7%. A delayed interest rate hike is also expected.
Key View
- Japan’s economy has faced global Trump tariff shocks directly and indirectly through slower US and China growth.
- The situation is rapidly changing, but for now, we have revised our 2025 growth forecast down from 0.9% to 0.7%.
- For monetary policy, we maintain the 25 basis points hike in 2025 but now expect it towards year-end, not mid-year as previously forecast.
Japan’s economy has faced global Trump tariff shocks. As a direct impact, the country has faced a US 25% tariff on its major industry, automobiles and 10% blanket tariffs, with threats of another 14% top-up reciprocal tariffs. The country will also face indirect impacts from slower economic growth in two major economic partners, the US and Mainland China. Our US team has revised down the 2025 growth forecast from 1.9%. Meanwhile, our China team has also revised down its growth forecast from 4.5% to 4.0% due to the 125-percentage point (pp) tariff hike imposed by the US. Given that more than 40% of Japan’s total exports and nearly 7% of Japan’s total value-added is tied to final demand in these two superpowers (see chart below), we expect Japan’s economic growth to be slower than we previously expected.
Japan, an economic powerhouse known for its export-driven growth, is positioned precariously in the wake of U.S. tariffs enacted during the Trump administration. The tariffs, particularly on steel and aluminum, have altered the landscape of international trade and create challenges for Japanese manufacturers reliant on these materials. As Japan integrates itself into global supply chains, any disruption from tariffs could stifle growth, hinder competitiveness, and diminish the trajectory of its economy.
In response to these tariffs, Japanese companies have faced increased production costs, undermining their profit margins. This economic strain is particularly burdensome for industries like automotive manufacturing, where Japan has historically excelled. While the Japanese government has sought to mitigate these impacts through various measures, the underlying uncertainty stemming from tariff policies continues to cloud the economic outlook. The potential for retaliatory trade measures could further aggravate these challenges, threatening existing market positions.
Ultimately, Japan’s economic growth trajectory may stall unless it can adapt to these external pressures. Strengthening domestic consumption and diversifying trade relationships appear essential strategies. As Japan navigates the complexities of the evolving trade landscape, fostering resilience will be crucial to offset the negative impacts of Trump’s tariff shocks and ensure sustainable growth for the future.
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