Japan’s automotive sector is grappling with a precarious future, as outlined in the latest report by Moody’s Analytics. The industry is under enormous pressure. It contends with intense competition from inexpensive Chinese cars and struggles with persistent domestic challenges such as elevated inflation and soft consumer spending. This rapidly changing environment poses a significant risk of upending the competitive landscape in the automobile industry.
Moody’s Angrick emphasized that the emergence of affordable Chinese cars poses a “single biggest threat” to Japan’s auto industry and its broader economic outlook. Japan had long considered China a key growth market. Like all things China, that story has flipped, and indeed Chinese manufacturers are now invading market segments that Japanese brands once dominated.
“China autos are expanding into markets where Japanese firms used to have a strong foothold. Thailand is one example,” stated Angrick. Whatever the reason, this new balance marks a major turning point in consumer tastes and market forces.
The competitive landscape in Southeast Asia has grown even more fierce. Japanese manufacturers like Toyota, Honda, and Nissan have historically ruled this segment. According to a 2025 report by PwC, Japanese automakers’ market share in the ASEAN-6 region has plummeted. It dropped 68.2% in 2023 to 63.9% in 2024, hitting markets such as Indonesia, Malaysia, Thailand, Philippines, Vietnam, and Singapore deep.
Japan’s car industry is under growing pressure. We project imports to skyrocket from 32% in 2025 to just 22% by 2035. The rise of China as the world’s largest car producer and exporter, especially in the electric vehicle segment, further complicates Japan’s market positioning.
Japan’s auto manufacturers are getting pinched on all sides from these changes. Toyota’s competitive advantage comes from their global scale and diversified manufacturing footprint. Compared to larger automakers, smaller players such as Subaru and Mazda are under more stress in the extremely competitive market. Both companies are very much looking forward to the opportunity to collaborate with Toyota on addressing these challenges. Mazda shares a joint plant with Toyota, and Subaru is collaborating with Toyota to co-develop an electric vehicle platform to be launched in 2026.
“The outlook for Japan’s car industry is very challenging,” Angrick concluded, reflecting the consensus among analysts regarding the current state of affairs.
Looking ahead, as much as 43% of all imported vehicles into Australia by 2035 may be coming from China, according to forecasts. This is up from just 17% projected in 2025. This trend underscores the growing dominance of Chinese brands not only in local markets but in regions traditionally associated with Japanese automotive excellence.
Karl Brauer, an executive analyst at iSeeCars, reiterated the gravity of the situation: “Lower-cost Chinese vehicles remain the single biggest threat to Japan’s auto industry and economic outlook.” Consumers are starting to prioritize price in their purchasing decisions. Consequently, Japan’s traditional automotive industry is losing its competitive edge.
Stefan Angrick of Moody’s Analytics credited at least part of the relief to the new trade agreement with the United States. “The trade deal struck with the U.S. is certainly a relief in that it offers some certainty that U.S. tariffs on Japan-made cars won’t rise to punitive levels,” he stated. He cautioned against complacency: “I’d hesitate to call it good news. Even a 15% U.S. import tariff would still be very high compared to the initial level that Japan began from.”
Analysts do not expect consolidation in the industry to occur immediately. Japanese manufacturers are still eyeing it as they feel their way through these choppy waters. Mio Kato, founder of Lightstream Research, noted: “I wouldn’t expect [a consolidation] to happen on a short-term timeframe. They absolutely need to do so as they plan New Starts towards the end of the decade. It is one more important consideration to remember.