Japan's Economic Countermeasures Amidst U.S. Tariff Tensions
On Monday, Japan announced a robust response to new U.S. tariffs targeting its auto exports, unveiling a comprehensive emergency economic package. This move comes as trade frictions between the long-standing allies threaten to disrupt supply chains across Asia.
Key Developments:
- The U.S. has imposed a 25% tariff on Japanese automobiles and a 10% tariff on other goods.
- Japan has introduced a ¥2 trillion ($14 billion) relief package to mitigate the economic impact.
- The yen has depreciated to a 34-year low against the dollar, reaching ¥143.
- Toyota shares have declined by 14% year-to-date.
Prime Minister Shigeru Ishiba criticized the tariffs as "unjustified," cautioning that they could strain the U.S.-Japan alliance. He assured reporters that Japan would respond decisively yet prudently to safeguard its industries. The tariffs, effective from May 4, primarily affect Japan's auto sector, which exported $48 billion worth of vehicles to the U.S. in the previous year. Analysts predict that these duties could reduce Japan's GDP growth by 0.3-0.5 percentage points in 2025.
Economic Countermeasures:
Japan's emergency package includes several measures:
- Fuel subsidies of 10 yen per litre.
- Low-interest loans for affected manufacturers.
- Expanded programs to relieve electricity bill burdens.
Trade Minister Ryosei Akazawa announced that Japan would seek dispute settlement consultations through the World Trade Organization while continuing bilateral discussions with the U.S.
Market Impact:
The yen's decline to ¥143 against the dollar reportedly prompted intervention by the Bank of Japan. Auto stocks led the declines on the Nikkei 225, which fell 1.2% in Monday's trading session.
Officials from both nations are expected to convene during the G7 summit in Italy this July. Japan has until July 15 to negotiate a suspension of the additional 14% "reciprocal" tariff.
Japan’s Strategic Leverage with U.S. Treasury Holdings
As the largest foreign holder of U.S. Treasuries, valued at $1.1 trillion, Japan has contemplated using its substantial debt holdings as a bargaining chip in trade negotiations with the U.S. However, this strategy carries significant risks.
From Rhetoric to Retraction:
- On May 1, Finance Minister Katsunobu Kato suggested that Japan's Treasury holdings could be a "card on the table" in trade talks.
- By May 4, Kato retracted his statement, clarifying that Japan has no intention of threatening to sell Treasuries, emphasizing their role in liquidity management for yen interventions.
Why the Shift?
- Alliance Preservation: Japan's reliance on U.S. security cooperation in Asia makes aggressive financial tactics risky.
- Self-Damage: Selling Treasuries would lower bond prices, potentially harming Japan's own reserves, as 30% of its $1.27 trillion foreign reserves are estimated to be in U.S. debt.
The Tariff Context:
The U.S. imposed a 25% tariff on Japanese autos and threatened an additional 14% reciprocal tariff, which could reduce Japan’s GDP by 0.5%. Tokyo's brief consideration of Treasury sales was a negotiation tactic aimed at pressuring the U.S. during the 90-day tariff pause ending in July 2025.
Why a Fire Sale Is Unlikely:
Despite its leverage, Japan faces constraints:
- Economic Fallout: Rapid Treasury sales would devalue Japan’s remaining holdings and strengthen the yen, hurting exports.
- Global Chaos: A massive Treasury sell-off could trigger a bond market crisis.
- Alternative Tools: Japan prefers targeted measures, such as the ¥2 trillion subsidy package for affected industries.
What’s Next?
Japan may seek tariff exemptions during the July 2025 G7 summit, potentially offering concessions on agricultural imports as softer leverage. Analysts also note that Japan’s life insurers could gradually reduce their Treasury exposure without government intervention.
Johan Chairil