Japan's economy maintains stability despite the impact of Trump's tariffs during the mid-year period.
Japan's Modest Economic Growth Amidst US Tariffs
The Japanese economy experienced modest growth in the second quarter of 2025, despite the impact of US tariffs, according to recent data. The country's GDP grew by 0.3% quarter-on-quarter and 1.0% annualized, exceeding market expectations and avoiding a technical recession.
Impact on Exports
Exports declined in value for the third consecutive year-on-year month in July, showing persisting pressure from US tariffs on Japanese goods such as automobiles and auto parts. However, export volumes increased for the fourth straight month due to automakers reducing prices to offset higher import costs from tariffs and maintain market share in the US.
The US initially imposed steep 25% tariffs (50% on iron and steel) in April 2025, but a trade deal subsequently lowered reciprocal tariffs to 15% for most Japanese imports, softening the blow somewhat.
Impact on Tourism
Retail sales remained sluggish due to waning inbound spending, indicating that tourism-related consumer demand was weak in the second quarter and early third quarter. The lingering trade tensions and tariffs contributed indirectly to dampening business confidence, which can affect tourism-related sectors.
Impact on GDP Growth
Despite export challenges and slow retail demand affecting certain sectors, Japan’s GDP growth was modest and better than expected, suggesting resilience in other domestic economic components. The upward revision of the prior quarter's GDP data also helped avoid a technical recession.
Other Factors Affecting the Economy
The Japanese economy's second quarter growth was also driven in part by a rise in capital investment (1.3%). However, the ruling Liberal Democrats and their coalition partner, Komeito, failed to win majorities in both houses of the parliament, potentially creating political uncertainty.
Moreover, the influx of foreign tourists has also sparked resentment among some Japanese due to various aspects of dealing with outsiders.
In summary, the US tariffs raised costs and exerted pressure on Japanese exports, especially automobiles and steel, forcing Japanese firms to lower export prices to maintain US market access. This constrained export value but did not derail overall GDP growth, which remained modestly positive in Q2 2025. Tourism and retail sectors showed signs of weakness, reflecting the broader economic caution linked to ongoing trade frictions.
[1] Source: Japan's Cabinet Office [2] Source: Japan External Trade Organization (JETRO) [3] Source: Reuters [4] Source: The Japan Times [5] Source: Nikkei Asian Review
Industry and finance were significantly impacted by the US tariffs on Japanese goods, particularly in the automobile and steel sectors. This forced businesses to adjust their strategies, such as reducing export prices to maintain market share in the US and keep production costs manageable. Meanwhile, financial indicators, like Japan's GDP growth, showed resilience in the face of these challenges, demonstrating a certain level of adaptability within the industry and the broader economy.
