‘Liberation Day’ 24% tariff will limit Japan’s growth

The ‘Liberation Day’ tariffs, together with separately announced higher tariffs on auto imports to the US, will lead us to cut our growth forecast for Japan. The direct impact of the tariffs will end the modest growth we projected in March, and we now think the economy will barely grow in 2025-2026. This initial estimate does not consider the indirect impact from high trade policy uncertainty and retaliation from other economies.

We think the Japanese government likely won’t impose retaliatory tariffs, hoping to reach a trade deal soon. Given Japan’s reliance on food imports from the US, retaliatory tariffs would further damage the households’ real income, which has already been hit by high food prices. The government will likely focus on relief measures to mitigate damages from the US tariffs.

We’ll lower our inflation projection to reflect weaker growth and lower commodity prices, assuming there are no retaliatory tariffs. But if global supply chain stress exerts inflationary pressures, it will exacerbate the economic fallout by squeezing household income.

As long as the ‘Liberation Day’ tariffs are maintained, the new growth and price outlooks will likely prevent the Bank of Japan from hiking the policy rate this year. The tariffs will also add challenges to decisions by the government, business community, and public. Damage from the tariffs will also make it harder for small firms to raise wages despite a secular labour shortage.