Higher US tariffs could mean recession, deflation for JapanーNHK WORLD-JAPAN NEWS
Yuko Fukushima from our business desk has more on that. Trump is now floating the idea of 30 to 35% tariffs. What should we make on this?
Well, there are various opinions, but as the head of a major business lobby said earlier, there’s no use reacting to every comment that Trump makes. Having said that, we can’t ignore the comment altogether as it is coming from the leader of the world’s largest economy. One economist I talked to, Kumano Hido, had a stark warning. He says if the US actually starts imposing tariffs that high on all Japanese goods, the country will fall into recession. If the US puts a 30% tariff on all Japanese goods, that would result in a loss of more than $40 billion for Japan. If the tariff is 35%, it would be more like $50 billion. Even now with the expected 10% levy, the loss would be about $25 billion. But the higher tariffs would wipe out all the profits of Japan’s exporters. That means the goal of the current and former administration to create a positive economic cycle of inflation and rising wages would not be achieved. Kim says of all the goods exported to the US, cars and auto parts are by far the most significant. They make up more than onethird of all shipments. There’s already evidence that US tariffs are having an impact on Japan’s car exports. The levies on cars started on April 3rd and auto parts a month later. As prices for exports remain mostly unchanged in May, one figure stood out. Export prices for North Americanbound passenger cars plunged almost 19% in May from a year earlier. Kimano says this is due to Japanese car makers cutting prices of their cars to be sold in the US. I think Japan’s car makers are very concerned that the number of units they sell in the US would plunge if the sticker price goes up. So they are actually dropping their prices. I would normally be worried that if they cut prices by 25% that would put them in the red, but I guess they can endure the situation for now as they make a hefty profit. They can probably afford to shoulder the additional costs.
Well, Kumano goes on to explain that the car makers themselves would not absorb the losses entirely. He says they would pass on the costs to their suppliers. If export prices for cars are falling, that means material suppliers will be asked to bring down their prices when dealing with the car makers. So the profit erosion will not end with the major car makers. It will spread to the first, second, and third tier suppliers along with the materials makers. This means the whole car industry will start to see lower profitability. He points out that this pressure on suppliers is nothing new for the car industry. I think structurally the major firms in the car industry have been generating profit by cutting costs for decades. Every 6 months the suppliers are asked to cut their prices. This has become a custom in the industry. So, if the car makers do not pass on the cost of tariffs to retail buyers, it could accelerate this already existing cycle that might push the industry and the economy as a whole back into deflation. Well, Kumano says that a return to deflation could be devastating. Japan only recently started to see steady inflation. that’s been bringing the price rises and corresponding wage hikes needed to spark an economic recovery. Okimono thinks absorbing the cost from the tariffs is not sustainable for the car makers and would actually be a bad business decision. Trump’s tariffs will not be an opportunity for Japanese companies, but they could be a turning point. The firms could raise sticker prices by differentiating their products and improving their marketing. I think Japanese companies are being tested on whether they can change their strategy to a business model where they seek to add more value to their products rather than just relying on cost cuts. Well, we’ll continue to closely follow the outcome of the tariff negotiations and how they will impact Japan’s economy.
US President Trump says he may slap levies of 30-35% on Japan. An expert says this could cause the economy to contract or even bring back an era of falling prices.
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