BOJ’s June Tankan Survey: Adverse Effects of U.S. High Tariffs May Appear from Now on

Editorial

16:35 JST, July 2, 2025

Although it was confirmed that the economy remains robust, there is a possibility that the adverse effects of the tariff policy by U.S. President Donald Trump will appear in earnest in the future. It is important for Japanese firms to ascertain the development of the tariff policy and map out business strategies.

The Bank of Japan has released the results of its Tankan quarterly economic survey for June. The diffusion index indicates corporate business confidence. The index for large manufacturing companies — a leading indicator — was 13, up 1 percentage point from the previous quarter, marking improvement for the first time in two quarters.

This is the first Tankan survey since the U.S. government imposed “reciprocal tariffs” and additional tariffs on automobiles in early April. Therefore, many in the financial markets had expected a second consecutive quarter of deterioration.

Behind the unexpected improvement may be the fact that exporting companies are holding off on raising prices by not passing along the additional high tariffs in their sales prices and and also trying to keep sales from declining by lowering export prices.

By squeezing earnings to a certain extent and preventing a sharp fall in sales, a deterioration in business confidence may have been avoided.

By industry, the iron and steel index rose by 15 points to minus 3, and the pulp and paper index improved by 11 points to 29, as material-related industries are passing along the higher costs in their sales prices.

It can be said that the gradual recovery trend was reaffirmed as a whole.

However, there is no cause for optimism. The reason is because among export-related firms, there are some sectors in which business confidence has deteriorated markedly.

The motor vehicles index declined by 5 points to 8, and the outlook also fell. Small and midsize firms in the automobile industry are even more concerned. The outlook among small enterprises fell by 8 points to minus 8.

The tariff negotiations between Japan and the United States have run into difficulties, and the July 9 deadline for the suspension of the additional portion of reciprocal tariffs is approaching. Trump complained recently, too, that the automobile trade is “not fair” for the United States and indicated that he would not compromise on the 25% additional tariffs.

The automobile industry, including related companies, is the backbone of the Japanese economy, as it supports about 5.5 million jobs. It also leads wage increases in the annual shunto spring wage negotiations. The Japanese government should persistently continue talks to revise the tariffs on automobiles.

However, a view has become more prevalent that it is becoming increasingly difficult to eliminate the high tariff policy at an early stage. Will companies raise selling prices by passing along the high tariffs in their sales prices, or increase local production in the United States? They will be tested as to whether they can work out strategies, including the rebuilding of procurement networks.

On the other hand, business confidence among large nonmanufacturing companies, which mainly rely on domestic demand, such as service businesses, fell by 1 point to 34. The retailing index was 18, down 3 points, as households have become thriftier due to high prices.

If wage increases continue not to keep pace with high prices, the realization of a virtuous economic cycle will become more distant. The hope is that the government will spend time discussing measures to deal with high prices.

(From The Yomiuri Shimbun, July 2, 2025)