On Japan’s Car Industry

Ichiro Suzuki

President Donald Trump doesn’t hide his displeasure with lopsided trade of cars between the U.S. and Japan. In 2023, Japan exported approximately 1.5 million automobiles that were worth $41 billion. On the other hand, American cars represents less than 1% of the Japanese car market. This translates to approximately 16,000 units sold, all imported from the U.S. Yes, the trade is absolutely one-sided.

Automobiles have been the largest export item by far from Japan to the U.S. and the rest of the world. They were the focal point of bilateral trade frictions with the U.S. in the late 1970s and onward. In order to calm down the anger of the Reagan administration, Japan in 1981 self-imposed restrictions on the numbers of car exports to the U.S. Prices on Japanese cars rose on import controls but they remained competitive at the time of the mighty U.S. dollar in the first half of the 1980s. In September 1985, G7 finance ministers gathered at the Plaza Hotel in New York and decided on devaluation of the overvalued greenback. The Plaza Accord had unleashed a meteoric rise of the Japanese yen, which would surge to 80 against the dollar from 250 in ten years. The super normal rise of the yen opened the floodgate of direct investments in the U.S., and elsewhere, by Japanese car makers. Prior to the Plaza Accord, Honda already operated a factory in Ohio and Nissan was beginning to build cars in Tennessee. Then, everyone rushed to the U.S., taking support industries with them. Today, roughly 3.3 millions cars are built in the U.S. by Japanese car makers. In addition, Japanese cars are also made in Canada and Mexico for the U.S. market. 

Imported cars represent 7.6% of the Japanese car market. German cars dominate there. Mercedes Benz tops all imports, followed by BMW, Volkswagen, Audi and Porsche. American cars are generally too big and often don’t fit the narrow roads in Japan. Their ostentatious images from decades ago don’t help, either. Flatly, American cars are perceived as uncool.

In the recent decades, the issue of lopsided automobile trade has died down though the balance didn’t change at all. To begin with, Japan’s trade surplus against the U.S. no longer stands out, as China has replaced Japan as the top exporter to the U.S., leaving the latter far behind. In addition, American car markers lost interest in selling their cars in Japan. With China’s entry into the WTO in 2002, capturing share of the the world’s most populous and fast growing market became a much greater priority than Japan that has fallen into a persisting economic stagnation, on top of difficulties of cracking into it. Their China strategy became wildly successful for a while. American cars appealed to the Chinese drivers and Buick became the top selling brand in China. In recent years, however, American car makers are in retreat, losing their market share quickly to the domestic Chinese brands. Having realized of near impossibility of catching up with American, German, Japanese and Korean forerunners in the internal combustion engine cars, the Chinese government made a strategic move to promoting electric vehicles that were still in their infancy. With heavy subsidies and fierce focus on them, EVs took off in China ahead of the rest of the world. Without legacy internal combustion engine cars, a move to EVs was executed relatively smoothly. While retreating from China, Detroit is today focused on development of mobility and EVs. They care little about Japan. On the other hand, BYD has announced its plan to introduce kei cars, or light automobiles, in a specially designed model for the Japanese market. In this popular segment, BEVs are marketed only by Nissan and Mitsubishi, whom BYD may think easy to beat. The move shows BYD’s seriousness to crack the Japanese market, in sharp contrast to Detroit-based car makers that basically did nothing.   

Donald Trump, however, does care about the massive automobile imbalance of trade between the two countries. He has imposed a 25% tariff on imported Japanese cars. It would be truly preposterous if the president is dreaming about completely closing the huge trade imbalance on cars, but attempts to bring the overall bilateral deficit numbers down is perfectly legitimate. The May custom data shows a 21.7% reduction on export prices of cars to the U.S. On the surface, the data shows that tariffs are not going to be paid by car buyers in the U.S. This, however, looks rather superficial and temporary. Tariff rates are being negotiated between the U.S. Until the final ‘deal’ of some kind is reached, car makers might leave their export prices 25% lower than they used to be. With the final deal in hand, they are likely to devise a strategy of passing tariffs to buyers as much as possible, to the extent price hikes don’t visibly hurt their sales. It would be a complex job to decide on the degree of price hikes on different models, taking into account of where the cars are made, Japan, Canada, Mexico and the U.S. Car makers aren’t fools, with their responsibility to generate profits for shareholders. So they are going to make every effort to pass the tariff costs to buyers, perhaps in a fashion not noticeable to them. 

The self-imposed export quota in the 1980s led to Japanese car makers’ move to higher-end segments with heftier profit margins. Upscale models such as Lexus and Camry were created in this period. Subcompact prices rose amid reduced supply, but they remained in high demand due to their performances, primarily fuel efficiency. Most likely, a similar pattern of developments is going to be seen in this round of trade frictions on cars. 

Toyota Motor feels great responsibility for producing three million cars in Japan out of ten million they sell around the world annually. The company feels obligated to keep jobs in Japan, especially in the central Japan region where they are headquartered. With sprawling industries that surround car makers, the automobile industry has an immense effect on employment. The automobile and its related industries employ an estimated 5.6 million people, approximately 10% of Japan’s total employment. While Toyota pledges to make every effort to hold onto three million cars produced in Japan, the company might have to make a tough decision of lowering the number if they are pushed to the wall. The company’s survival should take precedence over the self-imposed responsibility. The Japanese government needs to be a little nicer to the car industry, especially to Toyota. Bureaucrats might feel elated picking on the industry for a relatively minor safety standard violation, which has little to do with safety anyway. Toyota Motor chairman Akio Toyoda doesn’t hide his frustration for having been under-appreciated for what the automobile industry does for the Japanese economy. Among Trump’s complaints that are mostly ridiculous, one thing rings true: regulation in Japan is too tight. This has been an issue in the bilateral talks since decades ago. Safety standards regulations have not been keeping up with technology’s progress that has made cars vastly safer than they used to be. Even if the Japanese government relents on safety standards, however, that does not translate into a greater numbers of American cars sold in Japan. Deregulation is applied to everyone. 

Japan’s automobile industry stands at crossroads. It’s going through once-in-a century transition to EVs from internal combustion engines. Represented by BYD, the transition has spawned competent new entrants into the market. Then came massive tariffs from the U.S. Most likely Toyota is going to survive or even thrive in a changing landscape while Nissan’s standing is ever so precarious. The rest of the bunch is going to do their best to hang in. Overall, there is a reasonable chance of downsizing of the automobile industry in Japan, with some meaningful impact on the economy. 

About the author: Mr. Suzuki is a retired banker based in Tokyo, Japan.