Japan’s economy is experiencing notable challenges, as recent data reveals a sharp decline in the nation’s exports. In July, Japan’s exports year on year declined for the first time in more than two years, dropping by 2.6%, the sharpest decrease since February 2021. This regional downturn occurs against the backdrop of larger economic trends, such as a 7.5% decline in overall imports during the same month.
Japan’s economy was able to avoid contraction entirely thanks in part to a rebound in household spending. In the second quarter, it was up 0.3% q/q and 1.2% y/y. Analysts are taking a close look at the reasons behind this disparity and what all of these mixed signals mean. On July 22, Japan won a major victory in their trade battle with the United States. This agreement lowered the “reciprocal tariff” from 25% at the start of negotiations down to 15%, the same level that just three weeks ago former U.S. President Donald Trump threatened to impose himself.
Exports to the U.S. have been especially challenged with a 10.1% loss in July, following an 11.4% loss in June. Japanese auto exports to the U.S. saw a whopping 28.4% decline in July YoY. This drop followed a 26.7% drop in June. As you may know, autos are Japan’s second largest export behind only electronics. They are on track to become the largest U.S. export category to the U.S. by 2024.
According to positive economic indicators, net exports were a major part of the above economic growth in the second quarter. As Hirofumi Suzuki, Chief FX Strategist at Sumitomo Mitsui Banking Corporation, pointed out, this would add further volatility on Japan’s exports. He did point to a major spike in car imports from April through June. He cautioned that the effects of the new 15% tariffs would not be evident until August’s data is released.
Senior economist Masato Koike at Sompo Institute Plus expressed concern that Japan could fall into a recession. Peers argue the effect that tariffs have will largely determine whether the nation’s economic future is bright or dark.