Japan Exports Drop 2.6% in July as US Tariffs Bite, Economy Faces Pressure

Japan exports dropped 2.6% in July 2025 compared to a year earlier, marking the steepest fall in more than four years and the Ministry of Finance reported that cars, auto parts and steel led the decline. The slump outpaced the 2.1% fall forecast by economists. Although export volumes rose by 1.2%, companies absorbed US tariff costs by cutting prices. Imports fell 7.5% as crude oil, coal and liquefied natural gas shipments shrank by double digits. Despite lower imports, the trade balance flipped to a deficit of ¥117.5 billion.

US Tariffs Hit Japanese Goods

The sharp fall in exports underscored the impact of US President Donald Trump’s tariff measures. In April, the US imposed a 25% tariff on Japanese cars and auto parts and a 10% duty on most other goods. In June, the levy on steel imports doubled to 50%. Automobiles and parts account for about a third of Japan’s exports to the US. Toyota Motor Corp. recently warned of a ¥1.4 trillion ($9.5 billion) hit to its bottom line from the tariffs.

Exports to the US plunged by 10.1% in value. Shipments of vehicles fell by 28.4%, while auto parts declined by 17.4%. Even in terms of volume, vehicle exports dropped 3.2%. Analysts said Japanese exporters are slashing selling prices to offset tariffs and preserve market share.

Trade Deal Uncertainty

A trade deal agreed in late July is expected to lower levies on cars and goods to 15%. However, US Commerce Secretary Howard Lutnick said the written documentation for deals with Japan and South Korea remains “weeks away.” Economists warn that the lack of a clear timeline for implementing lower tariffs adds to uncertainty.

Taro Saito of NLI Research Institute noted that even with reductions, US tariffs will remain at least 10% higher than at the beginning of the year. He added that delayed implementation would deepen the negative impact on Japan’s economy.

Wider Global Weakness

Beyond the US, exports to China fell 3.5%, driven by weaker shipments of vehicles, auto parts and nonferrous metals. Exports to Europe declined 3.4% as steel shipments collapsed by 53.1%. The yen averaged 145.56 per dollar in July, about 8.9% stronger than a year earlier, further weighing on competitiveness.

Imports dropped 7.5%, with crude oil, coal and LNG shipments shrinking by double digits. However, the fall in imports failed to offset export weakness, leading to a ¥117.5 billion trade deficit.

Policy Response and Outlook

The Bank of Japan, led by Governor Kazuo Ueda, is expected to keep policy steady when it meets on September 19. The export slump may encourage a cautious stance on interest rate hikes. Japan’s economy has managed to grow for five straight quarters, but the new tariff-driven downturn risks reversing momentum.

The Japanese government already cut its economic outlook this month, citing the impact of US trade measures. Economists now warn that Japan’s economy may contract in the third quarter. Companies may also struggle to raise wages as profit pressures mount, threatening the fragile cycle of wage and price growth.

“The economy will likely contract in the third quarter due to a decline in exports,” Saito said. “It may take quite a while before the tariff-related uncertainty clears.”