Japan – Exposed by trade deal-lite
- 19 September 2024 (3 min read)
Trump negative, Harris neutral
As elsewhere, if the US election outcome is a Harris win, we see a broadly neutral impact for Japanese growth and the Bank of Japan (BoJ). But we would expect greater cooperation on trade and defence.
We expect a Trump presidency, by contrast, to weigh on Japan’s growth as any new tariffs would hit exports. Japan has two bilateral trade agreements with the US and recently agreed to remove the previous Trump-era steel tariffs on around 1.25 million metric tonnes per year. But only around 5% of Japanese goods are covered by this agreement, with notable sectors untouched, particularly autos, which would be vulnerable to broader tariffs. Japan would also probably benefit less than other Asian countries from the substitution of production of certain electronics away from China due to differences in the manufacturing basis. Japanese exports are also heavily exposed to potential China and US economic slowdowns, which account just under 40% of total exports. We thus expect to see export growth slow materially in 2025. Note that in Trump’s first term annual export growth slowed to 0.5% on average in 2018 and 2019, well below the 5% average in the first half of the 2010s.
A Trump presidency may also increase Japanese defence spending. During his last presidency, Trump required Japan to quadruple payments for the some 54,000 US soldiers stationed there, a cost to Japanese tax payers, with no benefit to growth. Given recent rhetoric, further sacrifices will be likely needed if it wants to maintain this presence. And while Trump's demand for increased independent security across the rest of the region may boost defence spending elsewhere, Japan are already prioritising this area, so a similar boost to growth looks unlikely.
Further, if a Trump victory leads to a more hawkish Federal Reserve (Fed), this would support the (BoJ) monetary policy increase towards neutral in the near term. Yet weaker domestic growth and a more dovish Fed amid a US slowdown for 2026 would likely put pressure on such a move and may even require some loosening.
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