The failure of the Asian nation to reach a trade deal this week will likely pile pressure on its fragile economy.

Prime Minister Shigeru Ishiba said yesterday after the Group of Seven summit in Canada that his country had not reached a comprehensive tariff agreement with the US as some disagreements persisted between the two nations.

“Japan and the US “explored the possibility of a deal until the last minute,” he added.

Tokyo is scrambling to find ways to get Washington to exempt Japan’s automakers from 25% automobile industry-specific tariffs, which are dealing a blow to the country’s manufacturing sector.

Japan also faces a 24% ‘reciprocal’ tariff rate starting on July 9 unless it can negotiate a deal with Washington.

Japan’s automobile sector accounted for about 28% of the total ¥21 trillion (US$145 billion) worth of goods the Asian country exported to the US last year.

Its total exports in May dropped 1.7% year-on-year by value to ¥8.1 trillion, government data showed, smaller than a median market forecast for a 3.8% decrease and following a 2% rise in April.

Exports to the US slumped 11.1% last month from a year earlier, dragged down by a 24.7% drop in automobiles and a 19% fall in auto components, while a stronger yen also helped reduce the value of shipments. Exports to China were down 8.8%.

“The value of automobile exports to the US fell, but their volume did not drop that much,” Daiwa Institute of Research economist Koki Akimoto said.

“This indicates Japanese automakers are effectively shouldering the tariff costs and not charging customers,” Akimoto said.

In terms of volume, US-bound automobile exports dipped just 3.9%.

So far, major Japanese automakers have refrained from price increases in the US to mitigate the tariff costs, except for Subaru and Mitsubishi Motors.

“They are buying time right now to see the course of Japan-US trade negotiations,” Akimoto said.

“The absence of price hikes could affect their profits, but their fiscal base is generally solid,” he added.

The impending tariffs had driven companies in Japan and other major Asian exporters to ramp up shipments earlier this year, inflating levels of US-bound exports during that period.

The data showed imports dropped 7.7% in May from a year earlier, compared with market forecasts for a 6.7% decrease.

As a result, Japan ran a trade deficit of ¥637.6 billion last month, compared with the forecast of a deficit of ¥892.9 billion.

Drag on GDP

The hit from US tariffs could add pressure on Japan’s lacklustre economy. Subdued private consumption already caused the world’s fourth-largest economy to shrink in January-March, the first contraction in a year.

They also complicate the Bank of Japan’s (BOJ) task of raising still-low interest rates and reducing a balance sheet that has ballooned to roughly the size of Japan’s economy.

The BOJ kept interest rates steady yesterday and decided to decelerate the pace of its balance sheet drawdown next year, signalling its preference to move cautiously in removing remnants of its massive, decade-long stimulus.

According to an estimate by the Japan Research Institute, if all the threatened tariff measures against Japan were to take effect, US-bound exports will fall by 20%-30%.

Some economists say those duties could shave around 1 percentage point of the nation’s gross domestic product (GDP).