U.S. President-elect Donald Trump's announcement of higher tariffs on imports to the U.S. will depress the performance of Japanese corporations. Many Japanese corporations rely on exports to the U.S. We expect earnings to remain stable in 2025. However, to maintain creditworthiness, financial buffers to withstand deteriorating earnings will become increasingly important.
Chart 1
What's Happening
Higher Trump tariffs are coming. He vowed an additional 10% tariff on imports from China, and a 25% tariff on imports from Mexico and Canada. The Republican Party plans to impose tariffs of 10%-20% on all imports to the U.S, including from Japan. The U.S. is Japan's biggest trading partner, and accounts for 20% of Japan's total exports.
Why It Matters
Tariffs on Japan would slash profits for Japanese exporters. Under a universal tariff scenario, Japanese companies will have to pass on the higher cost of levies through product prices, or absorb them by cutting costs. Doing either would prove difficult. Because prolonged inflation has worsened consumer appetite in the U.S., a further increase in production prices would likely reduce sales volume.
Tariffs on China and Mexico are a risk for Japanese companies' supply chain strategies. Many Japanese companies have production facilities in both countries, from where they export to the U.S. and the rest of the world. Further increases in tariffs on imports from China could have more negative impact on their supply chain.
What Comes Next
Tariffs on Japan would hit autos hardest. Japanese exports to the U.S. total about ¥20 trillion in 2023. The automobile sector made up the largest proportion of these exports at 29%, accounting for ¥5.8 trillion. Auto parts, with ¥1.1 trillion, made up 5.5%. About 30% of exports by Toyota Motor Corp. (A+/Stable/A-1+) are to the U.S. A tariff means up to 9% of Toyota's EBITDA could be at risk.
Capital goods manufacturers would come next. Power generating machines are the third largest sector for exports to the U.S., followed by construction machinery. Other than Komatsu Ltd. (A/Stable/A-1), which has a high local production ratio, higher tariffs are likely to depress profits for major capital goods manufacturers. As we assume the overseas production ratio for capital goods companies is lower than that of Japanese corporations overall, it suggests major capital goods companies depend on exports.
Increased tariffs on China, Mexico, and Canada would depress earnings for automakers and other Japanese corporations. Companies will therefore focus on realigning production bases and cutting costs. However, it will take time to see results. In the case of Toyota Motor, we believe the impact on earnings would be within rating tolerance if tariffs are imposed on imports from Mexico and Canada, and even Japan.
Higher tariffs on China would have more impact on Japanese corporations. A worsening economy in China will adversely affect Japanese companies operating in or exporting to that country. We lowered our forecast on China's GDP growth in 2025 to 4.1% from 4.3%. China is Japan's second-largest export market after the U.S., accounting for 17.6% of total exports in 2023.
If Chinese goods are exported outside the U.S. at lower prices, the market is likely to deteriorate. Excess capacity in China has been an issue for steel and chemical manufacturers. Nippon Steel Corp. (BBB+/Watch Neg/--) was placed on CreditWatch because of its planned merger with U.S. Steel. In its case, exports to Asia account for more than 20% of its consolidated sales. Price declines in Asia have dragged down its earnings.
Japanese companies will increasingly seek to acquire overseas companies. This is because it takes longer to relocate their production bases. Japanese corporations will risk spending more time and money on overseas acquisitions than expected. Many major markets are now inclined to protectionism, not just the U.S. This has toughened regulatory reviews in destination countries.
Related Research
- U.S. Elections 2024 How Could A Second Trump Term Affect U.S. Credit? Nov. 7, 2024
- Asian Steelmakers' China Strains Will Roll On, Nov. 6, 2024
- Auto Industry Buckles Up For Trump's Proposed Tariffs On Car Imports, Nov. 29, 2024
- Corporate Japan's Thirst For Acquisitions Risks Creditworthiness, Nov. 26, 2024
- Japan Corporate Credit Spotlight Resilience Amid Adversity Abroad, Oct. 17, 2024
This report does not constitute a rating action.
| Primary Credit Analyst: | Makiko Yoshimura, Tokyo (81) 3-4550-8368; makiko.yoshimura@spglobal.com |
| Secondary Contacts: | Hiroki Shibata, Tokyo + 81 3 4550 8437; hiroki.shibata@spglobal.com |
| Yuta Misumi, CFA, Tokyo +81 3 4550 8674; yuta.misumi@spglobal.com |
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