Japanese Economy: Uncertainty Due to Tariffs Remains High
2025-05-16
■ Although real GDP is expected to be weak in the January-March quarter, domestic demand remains strong. The impact of tariffs is anticipated to be felt after the April-June quarter.
■ Looking ahead, it will be crucial to observe how the Bank of Japan adjusts its outlook on tariffs and incorporates this into its monetary policy judgment.
In a joint statement on the 12th, the United States and China reached an agreement to significantly reduce tariff rates within 90 days. The tariff negotiations have made substantial progress due to the United States' compromise stance towards China, but the impact of this agreement on negotiations with other countries remains unclear. Japan is actively negotiating with the primary demand of withdrawing the 25% additional tariffs on key industries, such as automobiles. After the second round of Japan-US trade negotiations, Prime Minister Ishiba stated that "the situation where no consensus has been reached continues," indicating that there is still some distance to reach an agreement. The third round of negotiations is expected to take place in the middle of this month, but the chances of rapid progress in Japan-US negotiations in the short term are considered low.
Judging from the current economic climate, despite the uncertainties mentioned above, the Japanese economy still appears to maintain a moderate recovery rhythm. The real GDP growth rate for the January-March quarter, which will be announced tomorrow, is projected to show a slight decline, marking the first negative growth in a year (Reuters poll: a 0.2% year-on-year decline). However, considering the monthly statistics that have been released, it is difficult to conclude that the economy has shown signs of weakness. According to the actual export data released by the Bank of Japan, exports remained strong, propelled by "panic demand" prior to the tax increase, with the US market and automobile categories being the primary growth drivers. However, due to a sharp increase in actual imports from the previous quarter, net exports (= exports - imports) were negative, which is expected to exert downward pressure on GDP. In this context, domestic demand, including personal consumption and equipment investment in the January-March quarter, is anticipated to remain robust. Based on the monthly data, real wages fell by 2.1% month-on-month in March, which is still weak, but real consumer expenditure in the household survey rose by 0.4% month-on-month, marking two consecutive months of increase, suggesting that personal consumption is recovering moderately. This presents a positive factor for Japan, as the US-China joint statement has enhanced the likelihood of avoiding a significant deterioration in the economic circumstances of the two major economies, thereby lessening the indirect negative impact on Japan. Nonetheless, the direct negative impact of tariffs on Japan persists and may begin to manifest from the April-June quarter.
The "main opinions" from the Bank of Japan's meetings in April and May reveal that it is becoming increasingly difficult for members to achieve consensus on the economic outlook amid heightened uncertainty. On one hand, there is a view similar to the outlook report stating that "the US tax increase policy will put downward pressure on our economy and prices"; on the other hand, there are also perspectives asserting that "from the perspective of the proportion of exports in GDP, Japan's trade dependence is not high, so we should not only pay attention to the trend of US tariff policies but also domestic factors". Additionally, some members expressed concerns about the "risk of price increases caused by global supply chain disruptions, etc.", cautioned against overestimating the impact of tariffs on the economy and prices. Although the outcome hinges on the progress of Japan-US negotiations, the next rate hike is still projected to occur in the October-December quarter. As the situation surrounding tariffs continues to evolve, how the Bank of Japan adjusts its economic outlook moving forward and makes policy judgments based on it will be a key focus.
■ Looking ahead, it will be crucial to observe how the Bank of Japan adjusts its outlook on tariffs and incorporates this into its monetary policy judgment.
In a joint statement on the 12th, the United States and China reached an agreement to significantly reduce tariff rates within 90 days. The tariff negotiations have made substantial progress due to the United States' compromise stance towards China, but the impact of this agreement on negotiations with other countries remains unclear. Japan is actively negotiating with the primary demand of withdrawing the 25% additional tariffs on key industries, such as automobiles. After the second round of Japan-US trade negotiations, Prime Minister Ishiba stated that "the situation where no consensus has been reached continues," indicating that there is still some distance to reach an agreement. The third round of negotiations is expected to take place in the middle of this month, but the chances of rapid progress in Japan-US negotiations in the short term are considered low.
Judging from the current economic climate, despite the uncertainties mentioned above, the Japanese economy still appears to maintain a moderate recovery rhythm. The real GDP growth rate for the January-March quarter, which will be announced tomorrow, is projected to show a slight decline, marking the first negative growth in a year (Reuters poll: a 0.2% year-on-year decline). However, considering the monthly statistics that have been released, it is difficult to conclude that the economy has shown signs of weakness. According to the actual export data released by the Bank of Japan, exports remained strong, propelled by "panic demand" prior to the tax increase, with the US market and automobile categories being the primary growth drivers. However, due to a sharp increase in actual imports from the previous quarter, net exports (= exports - imports) were negative, which is expected to exert downward pressure on GDP. In this context, domestic demand, including personal consumption and equipment investment in the January-March quarter, is anticipated to remain robust. Based on the monthly data, real wages fell by 2.1% month-on-month in March, which is still weak, but real consumer expenditure in the household survey rose by 0.4% month-on-month, marking two consecutive months of increase, suggesting that personal consumption is recovering moderately. This presents a positive factor for Japan, as the US-China joint statement has enhanced the likelihood of avoiding a significant deterioration in the economic circumstances of the two major economies, thereby lessening the indirect negative impact on Japan. Nonetheless, the direct negative impact of tariffs on Japan persists and may begin to manifest from the April-June quarter.
The "main opinions" from the Bank of Japan's meetings in April and May reveal that it is becoming increasingly difficult for members to achieve consensus on the economic outlook amid heightened uncertainty. On one hand, there is a view similar to the outlook report stating that "the US tax increase policy will put downward pressure on our economy and prices"; on the other hand, there are also perspectives asserting that "from the perspective of the proportion of exports in GDP, Japan's trade dependence is not high, so we should not only pay attention to the trend of US tariff policies but also domestic factors". Additionally, some members expressed concerns about the "risk of price increases caused by global supply chain disruptions, etc.", cautioned against overestimating the impact of tariffs on the economy and prices. Although the outcome hinges on the progress of Japan-US negotiations, the next rate hike is still projected to occur in the October-December quarter. As the situation surrounding tariffs continues to evolve, how the Bank of Japan adjusts its economic outlook moving forward and makes policy judgments based on it will be a key focus.