Trump's Tariff Impact for Japan and BoJ

With the latest round of "universal" tariff, Japan is being hit again by double digit tariffs despite being the nice ally of the U.S. While we see little change of Japan's retaliation, it is worth looking into the impact towards the Japanese economy as auto export that is hit hard, is one of the major export of Japan. The magnitude of impact could also affect BoJ's pace of tightening given the worst economic outlook.
Along with the 25% tariff for auto, the latest round of universal tariffs from the U.S. came at 24%. Those will create a significant negative impact towards the Japanese economy, given its nature of export heavy. While Japan PM has exerted willingness to personally negotiate with Trump, it is unlikely to yield any result soon. As time past, Japan Prime Minister Ishiba openly states that he cannot make continuous compromises in US talks, indicating there is unlikely to be any substantial result for Trump's hopeful new trade deal. While how "the art of a deal" will play out, it is forecasted Japan will lost 17-21 billion USD annually on the auto tariffs' impact, subsequently dragging Japan's trade balance, economics growth and the labor market.
Auto Export accounts for roughly 20% of Japanese export, from which a majority goes to the U.S.. Despite China, South East Asia and Europe could have the potential to absorb some supply, it will take a period of time before Japanese auto industry to diversify and led to short term slump in profit. Toyota, sold more than a million vehicles to U.S. last year, has been named by Trump in several comment. It indicates such has caught his eye and unlikely to be merely a means to pressure for a new trade deal. The auto industry face short term sales pressure and affect the magnitude of wage growth in 2025. In Q4 2024, there was already signs that there is pre-emptive buying globally before any potential U.S. tariffs, could further see export in 2025 fall further on previous stockpile.
So far Japan has not taken a hawkish stance against any tariffs from the United States, instead they are taking a diplomatic path. They will likely to be leveraging on their strong trading relationship and commit more investment with the U.S. to negotiate. However, it is hard to see such tactic to yield with Trump openly oppose to the idea of acquiring U.S. steel by Japanese steel companies, reinforcing his ideology of U.S. made and owned. The Japanese government has also raised the issue to WTO.
The U.S. has delayed the latest reciprocal tariffs, suggesting their openness to negotiate a deal and we expect a deal to be reached eventually but when. It is hard to see the Japanese side compromise as much as promising to import an equal or more amount of U.S. goods than Japanese export. However, energy products could be a break through. As a big energy importer, Japan import almost all of its energy product consume domestically and could fit into U.S. agenda. The United States has been eager to export more of its energy products, especially LNG, to other countries. Japan and U.S. could be reaching some kind of deal from that prospect.
We initially forecast the BoJ to hike in May, given the current inflation and wage dynamics. However, the magnitude of U.S. tariff has an unknown yet certainly negative impact towards the Japanese economy and would prompt the BoJ to tilt towards on hold in the May meeting. While the current inflationary picture are well above BoJ's target and could point towards more cost push inflationary pressure, the BoJ will stay on the bench to observe future development as they do not favor tightening into cost push inflation and does not view such to be sustainable. Moreover, the potential disruption of economic growth will give the BoJ second thought. Yet, the pick up in wage could help the BoJ to rationalize their next hike in the June meeting if momentum persist to see growth above 2% y/y.