Japan's exports dropped 2.6% in July, led by steep declines in auto and parts shipments to the US

Japan’s exports fell at the fastest pace since 2021 as steeper United States tariffs hit the auto industry hard, raising concerns for the trade-reliant economy. The drop, led by a slump in car and auto parts shipments, reflects the growing strain from persistent trade frictions.

Government figures released Wednesday showed total exports fell 2.6% from a year earlier in financial terms, the sharpest decline since Feb 2021, when shipments slipped 4.5%. The fall exceeded a median prediction for a 2.1 percentage decline and marked a 3rd straight monthly slide after a 0.5 percentage decline in the month of June.

Regardless of the dip in value, export volumes have remained steady as many firms have avoided big price increases, chief economist at Norinchukin Research Institute, Takeshi Minami said. “But they would eventually have to pass on costs to U.S. consumers, and that would further hamper sales in the coming months,” he said.

U.S. tariffs weigh heavily on auto exports

Sales to the U.S. weakened. Exports in July dropped 10.1 percent compared with a year ago, as automobiles dropped 28.4 percent and auto parts dropped 17.4%. In volume terms, car shipments fell only 3.2%, indicating that prices reduced and efforts to absorb extra levies have partly cushioned flows.

Tariffs have been at the center of the shift. In April, the U.S. imposed 25% duties on cars and car components and warned of 25% tariffs on most other Japanese goods. Washington and Tokyo later reached an agreement on July 23 that cut tariffs to 15 percent in return for a U.S.-bound Japan’s investment package worth $550 billion. Even with that agreement, the tariff on automobiles remains far above the pre-tariff 2.5%, keeping pressure on leading carmakers and suppliers.

Trade balance turns negative as imports shrink

Exports to other key markets were also soft. Data shows that shipments to China fell 3.5% from a year earlier. Imports shrank as well. Total imports in July slipped 7.5 percent from a year before, relative to market expectations for a 10.4 percent fall. In comparison, July marked a six-month high for China’s rare-earth magnet exports, according to a recent report by Cryptopolitan.

The trade balance swung to a shortfall of 117.5 billion yen ($795.4 million) in July, versus a projected surplus of 196.2 billion yen. The latest trade numbers came after separate figures last week showed stronger-than-expected gross domestic product growth in the April-June quarter, supported by resilient exports and capital spending.

Economists noted that the robust export reading in GDP reflects differences in how price changes are counted in the two reports.

Even so, Minami said the economy has avoided the worst scenario so far. “As the tariff deal has at least reduced uncertainties, the Bank of Japan is likely to resume rate hikes as early as in October,” he said.

Japan, the world’s fourth-largest economy, relies heavily on overseas demand, and the steeper U.S. levies have filtered through to its auto industry. The data suggest companies have shielded buyers through discounts and absorbing costs, but such steps may be even harder to sustain if trade frictions persist this autumn.

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