US-Japan Tariff Negotiations: A Dance of Threats and Counter-offers

Aggressor delivers one punishing blow to the nose, after initially warning of a severe beating.

, and ASMedia

2025 September 3 . 7:13 AM

2 min read

US-Japan tariff talks marked by bluffing tactics and deal-making efforts

US-Japan Tariff Negotiations: A Dance of Threats and Counter-offers

In a significant development, the long-awaited US-Japan trade deal has been finalised, bringing both opportunities and challenges for Japan.

The agreement, which reduces tariffs on Japanese cars and auto parts from 25% to 15%, is a positive step for Japan's critical automobile sector. However, the reduction from historic low US tariffs (previously 2.5%) to 15% still represents a considerable tariff burden compared to the past, potentially dampening Japanese exporters' price competitiveness in the US market over the long term.

One of the key aspects of the deal is a $550 billion Japanese investment into US infrastructure, semiconductors, and energy. This investment aims to strengthen bilateral economic ties and create investment returns for Japan. However, this large investment commitment may elevate Japan’s trade deficit with the US by increasing imports from Japan to get dollars for investment, while US exports to Japan may stagnate or fall.

The deal also includes Japan's agreement to expand US imports of agricultural products such as rice by 75%, and to increase purchases of US defense equipment. While this opens US export opportunities, Japan remains cautious about protecting its own agricultural sector, so long-term commitments may be revisited.

The US-Japan trade deal has injected fresh optimism into Japanese equities, particularly for European investors. With hedging costs easing, euro-based investors may find Japanese stocks more attractive on a currency-adjusted basis. Japanese direct investments in Europe are increasing, with total investment stock reaching approximately €160bn.

However, Japanese firms are exploring alternative markets and considering reshoring strategies due to the lack of relief from US tariffs on steel and aluminium. The high tariffs on these sectors continue to drive up export costs and reduce competitiveness in key markets like construction and aerospace.

The deal is still seen as broadly outlined rather than fully detailed, with quarterly reviews by the US government and threats of reinstating higher tariffs if progress is unsatisfactory. This ongoing uncertainty complicates Japanese industries’ long-term planning and investment.

Geopolitically, Japan has nowhere else to go and relies on its alliance with America, which may be existential for Japan. The US would find it difficult to remain a major player in East Asia without a well-armed and actively engaged Japan, given Chinese ambitions.

In conclusion, the US-Japan trade deal represents a significant reconfiguration of US-Japan trade relations. While strategic Japanese investments shore up bilateral ties, tariff increases and geopolitical uncertainties present headwinds for export competitiveness and economic stability in Japan. Defensive sectors in Japan, including consumer staples and healthcare, gain appeal amid trade uncertainty and demographic trends. Export sectors, however, face ongoing challenges due to currency volatility and tariff pressures.