By Makiko Yamazaki

TOKYO (Reuters) – Japan’s exports have fallen for a second consecutive month due to U.S. tariffs impacting manufacturers, revealing greater risks for the fragile economy amid a global trade war.

Japan has not reached a trade deal with the U.S. before the July 9 expiration of the temporary pause on tariffs, as it concentrated on addressing existing 25% tariffs on automobiles, a key sector for its export-driven economy.

Washington plans to impose 25% tariffs on Japanese imports if a trade agreement isn’t finalized by August 1.

“The tariff impact is likely to intensify in coming months, as the tariff rate is finalized and Japanese companies may need to pass costs to U.S. consumers, harming the competitiveness of Japanese products there,” said Koki Akimoto, an economist from Daiwa Institute of Research.

Exports from Japan, the world’s fourth-largest economy, decreased by 0.5% in June compared to the previous year, falling short of the median market forecast of a 0.5% increase, and marking the first decline in eight months after a 1.7% decrease in May.

Exports to the U.S. plunged 11.4% in June, the largest monthly drop since February 2021. This decline was influenced by a 26.7% decrease in automobile exports, a 15.5% drop in auto components, and a staggering 40.9% fall in pharmaceuticals.

However, the volume of automobile shipments grew by 3.4%, suggesting that Japanese automakers may be reducing prices on exported vehicles and absorbing tariff costs to maintain competitiveness.

“Japanese automakers have managed to keep production levels stable by sacrificing margins, so the impact of tariffs on their production activities has been limited,” explained Koya Miyamae, senior economist at SMBC Nikko Securities.

Akimoto from Daiwa mentioned that Japanese firms will eventually need to raise prices as trade negotiations continue and the yen remains strong.

Japan’s exports to the U.S. accounted for 21 trillion yen last year, with automobiles making up roughly 28% of this total.

The trade surplus with the U.S. in June reduced by 22.9% to 669 billion yen ($4.51 billion).

Exports to China also fell by 4.7%, according to the data.

Total imports rose by 0.2% in June from the previous year, contrasting market expectations of a 1.6% decrease.

Consequently, the trade balance showed a surplus of 153.1 billion yen ($1.03 billion), compared to an anticipated surplus of 353.9 billion yen.

These U.S. tariffs further pressure an already struggling Japanese economy, which is facing weak domestic consumption. The economy saw a contraction in the first quarter, attributed to rising living costs diminishing demand.

Due to prolonged uncertainties surrounding tariff impacts and trade negotiations, analysts predict that the Bank of Japan will continue focusing on downside risks to the economy and hold off on interest rate hikes for the time being.

($1 = 148.4300 yen)