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Japan exports declined in May, marking the first drop in eight months. The drop was driven by weak US demand and trade uncertainties which raised concerns on Japan’s economic growth.
The weak results came a day after the Bank of Japan kept its policy rate unchanged once again amid trade uncertainty. Meanwhile, Japan’s central bank governor sent cautious messages about the outlook, pushing back expectations over the timing of the next interest-rate rise.
Exports Decline Due to Low Demand
Japan’s exports decline by 1.7% in May, with an 11.1% drop to the US alone. The decline was due to weaker shipments of cars, auto parts, and machinery for chip making. Exports to China, Japan’s largest trading partner, was down 8.8%. ⁽¹⁾
Japan’s global automobile exports dropped 6.9%, but notably, exports of motor vehicles to the US declined 24.7% YoY. Japanese carmakers accounted for 28.3% of all exports to the US in 2024, according to customs data. Japan’s trade surplus with the US shrank 4.7% from a year earlier, marking the first decline in five months. ⁽²⁾
Imports to the world’s third-largest economy fell 7.7% in May, compared to expectations of a 6.7% decline. Japan’s trade deficit stood at 637.6 billion yen in May, smaller than the 892.9 billion yen deficit expected. ⁽³⁾
Impact on Japan’s Auto Industry
Besides the current 25% tariff on its auto, steel exports to the US, Japan is also facing a 24% reciprocal tariff rate on all other exports starting on July 9. This could threaten Japan’s wage growth momentum, which is a factor for the BOJ’s goal of stabilizing inflation and supporting economic growth. If the tariffs take effect, it could hurt Japan’s economic recovery as it could lead to losses in the auto industry. ⁽⁴⁾
It remains uncertain whether Japan’s attempts to exempt goods from higher US tariffs will be successful.
Prime Minister Shigeru Ishiba held talks with President Trump on the sidelines of the G7 summit in Canada on Monday. Ishiba said the two countries have yet to reach an agreement on a trade package but will continue discussions at the ministerial level.
Bank of Japan’s Policy Challenges
The BOJ held rates steady on Tuesday, June 17 due to trade uncertainties. The BOJ has revised its growth estimates downwards as exports may continue to weaken, and corporate profits could still decline. Weak exports were contributors to a 0.2% contraction in GDP in Q1. ⁽⁵⁾
The BOJ stated that trade policies and their global impact remain uncertain, complicating plans for rate hikes. If Japan manages to avoid being hit with an additional reciprocal tariff, keeping the duty it’s subject to at the 10% baseline, that could open room for a BOJ rate hike later in 2025. ⁽⁶⁾
