Japan in economic depression: automotive industry facing tariffs and uncertainty!

Japan in economic depression: automotive industry facing tariffs and uncertainty!

Japan's economy contracted in the first quarter of 2023. According to a report by South German newspaper Gross domestic product (GDP) fell by 0.2 percent in the period from January to March. This revised figure is significantly better than the initial estimate of a 0.7 percent decline. The revised data shows that the Japanese economy had already lost momentum before the trade dispute with the USA.

The looming trade conflict is of increasing importance as US tariffs against Japan are set to take effect in July 2023 unless successful negotiations take place. Japan is trying hard to persuade the U.S. government to exempt automakers from tariffs that could be as high as 25 percent. The automobile industry is the country's largest economic sector.

Worsening economic prospects

The economic outlook for Japan has improved loudly Germany Trade & Invest noticeably worsened. In addition to weak consumption, additional import tariffs in the USA are contributing to economic uncertainty. Since April 2025, additional import duties of 10% have applied to Japanese goods and 25% to cars and steel. From July 2025 there is a risk of further US tariffs of 24% on all other Japanese products.

Japan and the USA are currently in negotiations regarding the tariff dispute, with the USA being considered Japan's most important partner. This is not only the largest foreign investor, but also almost 20% of Japanese exports go to the United States.

Economic developments and challenges

The Japanese economy will have lost its position as the world's third largest economy to Germany in 2023. In fiscal 2024, real GDP grew by 0.8%, but expectations for economic growth in fiscal 2025 are below this figure. Car production in 2024 fell short of the previous year's figures, and manufacturing value added fell by 2.2%.

While banks and insurance companies benefit from interest rate increases, tourism and the healthcare sector are growing. However, the construction sector has seen a decline and small businesses have a pessimistic outlook. Export-oriented companies are benefiting from the weak yen and increasing equipment investments, but tariffs and uncertainties are slowing investments in the automotive industry.

International trade relations

The chemical industry and tourism are showing positive developments with many new projects, while defense spending is also increasing. The Japanese government is promoting renewable energies and nuclear power plants and is researching hydrogen solutions.

Nominal wages are rising but real wages are falling, indicating weak private consumption. In 2024, Japan's imports fell 1.2% to $742.7 billion, while exports fell 1.5%. The Japan Foreign Trade Council expects exports and imports to increase in fiscal 2025, depending on U.S. tariffs.

German exports to Japan recorded an increase of 16.7% to 6 billion euros in the first quarter of 2025. Japan remains the second largest buyer of German goods in Asia, and 93% of German companies in Japan value the stability and reliability of business relationships. The weak yen also offers opportunities for the acquisition of Japanese companies, which is reinforced by the recent takeover of a plant by Bosch. German companies are expanding their production in the chemical and pharmaceutical industries, supported by a free trade agreement with the EU that allows duty-free deliveries of most industrial goods to Japan.