Japan to hold out for better trade deal with US

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Japan has signalled it is prepared to hold out for a better deal with US President Donald Trump over trade tariffs, pushing for full removal of his 25 per cent duty on imports of Japanese cars rather than risk a domestic political backlash.

Japan, the US’s biggest outside investor and closest ally in Asia, is keen to avoid any souring of relations with Washington and Prime Minister Shigeru Ishiba initially made a priority of getting to the US negotiating table ahead of other nations.

But pressure from business leaders and members of Ishiba’s own Liberal Democratic party to reject any deal that puts the car sector at risk or threatens domestic farmers have forced him to recalculate, officials and analysts said.

“Although Japan was very keen to be the first nation to open negotiations with Washington on tariffs, that sense of urgency has now shifted and the emphasis is on ensuring that Japan gets a good deal,” said an official in Tokyo with direct knowledge of the negotiations.

Officials said a deal was now unlikely to be reached before elections for Japan’s upper house of parliament that are due by late July and are already expected to be difficult for Ishiba’s highly unpopular administration. 

Japan’s negotiators, led by economy minister Ryosei Akazawa, have held two meetings with Trump administration officials. A third is planned for next week. Tokyo’s finance minister Katsunobu Kato is also hoping to resume talks with the US Treasury Secretary Scott Bessent on the sidelines of a G7 meeting in Canada next week.

Japan’s starting position remains the elimination of all new US tariffs, including a 25 per cent levy on automotive, steel and aluminium imports and a 24 per cent “reciprocal” tariff on other Japanese goods that has since been temporarily reduced to a 10 per cent “baseline” level.

The impact on the operating profits of US tariffs on Japan’s big automotive companies is expected to be about ¥2tn ($13.7bn) in the current financial year ending next March, according to company and analyst estimates, although the impact could be offset by measures such as price increases. Japan’s economy shrank for the first time in a year in the first quarter.

“Auto and auto parts is the biggest exporting sector from Japan to the US,” said a second Japanese official with knowledge of the talks. “It means this US-Japan negotiation must deal with this auto tariff issue. If we cannot make progress in this sector, then I think we cannot reach any consensus.”

Tokyo’s strongest offers for Washington could be larger purchases of US agricultural products, greater market access for US cars and investment in a liquefied natural gas pipeline project in Alaska, said the officials.

But with the July upper house elections looming, Ishiba has told parliament he will not sacrifice the domestic agriculture industry, also a big employer, to win tariff reductions for automobiles.

“Japan’s position has hardened. Shigeru Ishiba is fighting for his — and his party’s — political life. He can’t just roll over. Autos accounted for 81 per cent of Japan’s trade surplus with the US in 2024. If PM Ishiba fails to get tariff relief in the autos sector, he’s on a conveyor belt towards rotating knives,” said Nicholas Smith, a Japan strategist at CLSA.

Experts said it was unclear how much leverage Japan had over the White House. Tokyo is dependent on Washington for security and reported a $63bn trade surplus in goods with the US in the 2024-2025 fiscal year. The Trump administration has accused Japan of deliberately weakening the yen, further complicating talks.

Ishiba, who leads through a fragile coalition, fears a one-sided deal would deepen the crisis for the ruling LDP. His gamble on a general election in October backfired, resulting in the party losing its lower house parliamentary majority for the first time since 2009.

July’s upper house elections could inflict further damage, particularly if the farming lobby feels it has been betrayed by a deal that opens the floodgates to US agricultural imports.

One early proposal from Japan, according to officials, was to link levels of investment in the US by Japanese companies with percentage-point cuts to tariffs.

The US Treasury and US trade representative did not immediately respond to a request for comment.

“The problem Japan has is that, on principle, it doesn’t want a deal that looks hammered-out at speed, but at the same time it cannot rely on the idea that the US has the patience for a sophisticated agreement,” said the official with direct knowledge of the talks.

Stephen Nagy, professor of politics and international studies at the International Christian University of Tokyo, said Ishiba’s strategy was based on the idea the US would value its security partnership over tariffs.

“I think that Japan will realise that Trump is committed to a baseline of tariffs,” said Nagy. “No matter what it does or says, Japan cannot get away from this.”