Japanese Economy: Tariff Negotiation Deadline Approaching July 9

■ The deadline for trade negotiations with the United States is set for July 9. Amid the upcoming Senate election on July 20, whether the deadline for reaching an agreement will be extended has become a key focus.  

■ Although automakers are facing a challenging operating environment, the economic sentiment among large companies has not yet become excessively pessimistic. 
  
   The deadline for the US government to suspend mutual tariffs will expire on July 9. While negotiations between Japan and the United States are ongoing, Japan hopes to eliminate additional tariffs on key industries such as automobiles. However, differences with the United States remain unbridged. On July 3, US Treasury Secretary Bessette expressed understanding, stating: "Japan will face the Senate election on July 20, and there are many domestic constraints in reaching an agreement." President Trump revealed last weekend that he had notified 12 to 15 countries, which have not yet reached an agreement, of new tariffs of up to 70% scheduled for August 1. This move is seen as exerting pressure to close the deal, while also hinting at a three-week negotiation buffer. Whether Japan is included remains unclear. As the deadline nears, the outlook for Japan-US negotiations remains uncertain. 
 
   The automobile tariffs introduced in April have caused difficulties for Japanese automakers. According to May data from the corporate price index and customs statistics, the price of passenger cars in the North American market (in contract currency) fell sharply by 18.9% year-on-year, while exports of automobiles to the US decreased by only 3.9%, indicating that Japanese automakers are trying to offset the impact of tariffs by significantly reducing export prices. However, this strategy is gradually reaching its limits, with four of six major automakers planning to raise prices. If this trend continues, profit margins might improve, but concerns over declining sales could increase. 
 
   Despite this, the corporate sentiment index (near-term) from the Bank of Japan's Tankan survey in June showed that the large manufacturing sector scored 13 (up 1 point from the previous survey), and the large non-manufacturing sector scored 34 (down 1 point), maintaining high levels. Although the future outlook for industries like automobiles and steel—more affected by tariffs—shows caution, overall corporate sentiment remains stable and not overly pessimistic. The operating profit plans across all sectors for fiscal 2025 (down 5.7% year-on-year) are lower than those in the March survey, but equipment investment plans (including land, up 6.7% year-on-year) have increased, indicating that companies' cautious stance towards investment has not worsened significantly. Additionally, inflation expectations (one year at 2.5%, two years at 2.4%, five years at 2.3%) suggest that companies expect inflation to stay above 2% over the next three years. 
 
   Currently, inflation in Japan continues to rise. However, the Bank of Japan is expected to remain cautious, emphasizing the high short-term uncertainty caused by tariff policies and adopting a wait-and-see approach. At the June 16-17 meeting, four of five policy rate opinions aligned with the policy statement and the governor's press conference, supporting the maintenance of current interest rates. Only one suggested adjusting monetary easing intensity due to rising prices. It is anticipated that the Bank of Japan will stay cautious in the short term, with the next rate hike possibly between October and December.