Why US-Japan trade deal has fuelled scepticism on both sides

President Donald Trump touts vast profits and jobs that will benefit America

Japan's Prime Minister Shigeru Ishiba speaks to reporters about the trade deal with the US, at his office in Tokyo. EPA

The US and Japan have struck what President Donald Trump claims is the "largest trade deal in history".

Japan will now pay 15 per cent tariffs on exports to the US, as opposed to the 25 per cent threatened by the Trump administration previously. That is in addition to other concessions that would address the US trade deficit with Japan.

The agreement has been poised as a win-win for the world's biggest and third-biggest economies, but those affected by the deal have voiced a more critical view of how it will work against US car makers and more.

The fix?

Under Wednesday's US-Japan deal, Japan will invest – "at my direction", Mr Trump said – $550 billion into the US economy, "which will receive 90 per cent of the profits".

Japan will also grant access to other key goods including cars, lorries, rice and "certain other agricultural products and other things". It is unclear what those "other things" are.

In addition, Mr Trump claims the agreement will lead to the creation of "hundreds of thousands" of jobs.

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In return, among other things, Japan will allow more US-made vehicles in to compete with its own stable of car manufacturers.

"This is a very exciting time for the United States of America, and especially for the fact that we will continue to always have a great relationship with the country of Japan," Mr Trump added.

Japan's reaction

Japanese Prime Minister Shigeru Ishiba said the deal would be "positive" for the global economy, although he stressed that his government needed to "examine the details" before finally endorsing it.

“We believe that this will contribute to the creation of jobs, the production of good products and the fulfilment of various roles in the world through the mutual co-operation of Japan and the US,” he said.

Ryosei Akazawa, Japan’s chief trade negotiator, earlier this month said Japan would not agree to a deal unless the US reversed tariffs on cars, stressing: “There is no point in striking a deal with the US without agreement on auto tariffs”.

Japanese markets embraced the outcome, however: car maker shares, in particular, are surging. As of 10.33am UAE time, Nissan's stock is up nearly 8 per cent, Honda jumped 10.6 per cent and Toyota, the world's biggest car manufacturer, leapt 14.14 per cent.

At least for now, the deal "looks to be a positive outcome for Japan", said Carol Kong, a currency strategist at Commonwealth Bank of Australia.

But convincing Japan, a major trade partner, to agree might be more of a victory for Mr Trump in his trade tariff saga.

Politically, however, the timing is "unfortunate", according to Kazutaka Maeda, an economist at the Meiji Yasuda Research Institute in Tokyo.

Had Mr Ishiba – who is under pressure to leave office after his party lost its majority in elections at the weekend – finalised the deal before Sunday's upper house vote, "it might have bolstered his party's performance", Mr Maeda said.

US caution

While indeed Mr Trump seemed excited about the agreement, there have been cautionary messages from other US parties affected.

Federal Reserve chairman Jerome Powell – who has been at long-running odds with the President – has repeatedly warned that Mr Trump's tariff policies, including the one with Japan, may temporarily raise inflation and "more persistent" pricing pressures.

Expectations for inflation targets continued to drop in the US: last week, government data showed the consumer price index rose to 2.7 per cent in June, from 2.4 per cent – still below the Fed's 2 per cent target.

Even the US car industry is sceptical: US stalwarts General Motors and Ford, and French major Stellantis, have said the deal is uneven.

The argument is that while Japanese vehicles now enjoy a lower 15 per cent tariff, maintaining the 25 per cent levies on those from Canada and Mexico, America's two biggest trading partners, may harm not just the North American auto industry, but also affect its workers.

"Any deal that charges a lower tariff for Japanese imports with virtually no US content than the tariff imposed on North American-built vehicles with high US content is a bad deal for US industry and US auto workers," said Matt Blunt, governor of the American Automotive Policy Council.

Background

While the US and Japan have been close trading partners for a long time, they have never had a comprehensive bilateral free-trade agreement.

Japan is America's sixth-biggest trading partner, the biggest holder of US Treasury securities and a major source of foreign direct investment, according to the US Bureau of Economic Analysis.

US exports to Japan hit $129 billion in 2024, with imports clocking in at $192 billion, BEA data shows.

That resulted in the US running a $69.4 billion trade imbalance – also known as a negative trade balance or deficit – with Japan, according to the US Census Bureau. An imbalance happens when a country imports more than it exports.

On April 2, Mr Trump announced a 25 per cent tariff on Japanese imports, in addition to 50 per cent on steel and 25 per cent on vehicle imports from most countries, including Japan.

At the time, Mr Ishiba called the tariffs "disappointing" but it did set the stage for Japan, and other countries to come to the negotiating table with the US.