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US tariff threat on Japanese autos has eased

US tariff threat on Japanese autos has eased

The threat of higher US tariffs on Japanese car exports has subsided after the two economic powers agreed to come to the table to start fresh trade talks

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By Jackson Lewis 16.10.2018

The threat of higher US tariffs on Japanese car exports has subsided after the two economic powers agreed to come to the table to start fresh trade talks, Reuters analysts said on Monday. However, the Trump administration's desire to battle with China and other countries is still likely to have a notable impact on Japan.

Washington appeared to be preparing for another trade standoff in the summer when it said that 25% tariffs on auto exports from Japan were in the offing, but those plans are now on the back burner as it looks to come to an agreement via new talks.

US President Donald Trump has spoken regularly of his frustration at the growing trade surplus with Japan, which currently stands at US$69bn. The car industry is a particular focus for Trump, as it accounts for almost two-thirds of that surplus, and he is eager to come to a new agreement that he feels will give the US better value while addressing the surplus.

Out of 35 polled Reuters analysts earlier this month, 27 said that the likelihood of a higher rate of tariffs on Japanese vehicles had either dropped off “to some extent” or “significantly.” It appears that Japan can breathe a sigh of relief for now, as worsening tensions and direct conflict are unlikely while talks continue.

Most economists are confident that the threat has eased, but other analysts have warned that tariff hikes may still arrive before the end of the year, as there has not effectively been any shift in stance from the US on the need to reduce the trade deficit. The US currently imposes a tariff rate of 25% on trucks and 2.5% for auto vehicles.

"There is no change in Washington's stance that it is demanding Japan cut its trade surplus with the US," Itochu Economic Research Institute Chief Economist Atsushi Takeda said. "So, there is still a chance that Washington will execute some kind of restrictions on Japan's auto exports to the US, including higher auto import tariffs."

While there is still uncertainty about US-Japan trade tensions, Trump has outlined his intentions to ratchet up conflict with China after warning that he has the tools at his disposal to hurt the country’s economy further. There are no signs of a meeting of minds between the US and China for now.

This means that Japan is likely to see effects from the trade war in the coming months, and 25 of the 34 economists polled said that they now expect the impact on Japan to be either “significant” or “very significant.” Nord/LB Economist Stefan Grosse added: "Especially China is a very important market for Japan. So, there will be an impact."

Analysts expect Japan’s economic growth to have cooled during the third quarter due to the recent wave of earthquakes, typhoons and flooding, but that slowdown is only likely to be temporary. Government sources said last week that an additional 94bn yen budget will provide relief for the disasters.

"The economic growth likely temporarily weakened in July-September due to natural disasters," Japan Research Institute Economist Yousuke Yasui said. "But we expect domestic demand will lead the economic recovery."

Japan's economy should grow by 1.2% during the fiscal year, which is slightly down on the 1.1% forecast from last month. Consumer inflation also remains stubbornly low and is unlikely to hit the Bank of Japan’s (BoJ’s) 2% target anytime soon. Economists expect the BoJ to intervene eventually and pivot away from its ultra-loose monetary policy, but the majority believe that this will not happen until 2020 at the earliest.

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