Nomura: The new agreement does not meet the "reduction of trade deficit target," and the tariff issues between the U.S. and Japan are far from over

The US and Japan unexpectedly reached a tariff agreement, but trade differences are far from resolved.

According to news from the Chasing Wind Trading Desk, a recent report from Nomura Research Institute shows that the tariff agreement reached on July 22 will reduce Japan's export tariffs to 15%, but it has not achieved the Trump administration's goal of completely eliminating the US trade deficit with Japan.

The agreement is expected to only reduce Japan's trade surplus with the US by about 70%, and there are still differences between the two sides regarding the details of the trade agreement. Therefore, the Trump administration may continue to apply pressure, including imposing new tariffs on the pharmaceutical and semiconductor industries.

Nomura's analysis predicts that the agreement will cause Japan's real GDP to decline by about 0.55%, equivalent to a nominal GDP reduction of 3.3 trillion yen, with a 50% probability that the Japanese economy will fall into recession by the end of 2026.

Unexpected agreement reduces tariffs to 15%, but cannot eliminate the deficit

According to CCTV News, on July 22 local time, US President Trump announced via social media that the US and Japan had reached a trade agreement: the tariff rate on Japan is set at 15%, along with Japan's $550 billion investment in the US.

Nomura believes that the timing of the agreement was completely unexpected, as there was a significant gap between the US and Japan's positions on tariffs prior to this. The Japanese government had initially demanded that the Trump administration eliminate or significantly reduce all tariffs, including automobile tariffs. From this perspective, Japan's acceptance of a 15% tariff rate is a significant concession.

However, according to Nomura's estimates, a reciprocal tariff of 15% will reduce Japan's exports to the US by about 2.2 trillion yen. To completely eliminate Japan's trade surplus through tariffs alone, the tariff rate would need to be raised to 60%.

Additionally, the proposal that the Trump administration values most in the agreement may be Japan's commitment to expand its investment in the US to $550 billion (8 trillion yen). The Japanese side stated that these investments would be supported through investments, loans, and loan guarantees from government-backed financial institutions, with the actual investments ultimately decided by Japanese companies. Therefore, the $550 billion figure is merely a target level set by the government.

Trade surplus reduction reaches 70%, failing to meet Trump's goal

The ultimate goal of the Trump administration is to completely eliminate Japan's trade surplus with the US (i.e., the US trade deficit with Japan), which is projected to reach 8.6 trillion yen by 2024.

According to the terms of the agreement, Nomura estimates the effects of various measures as follows:

• A 15% reciprocal tariff will reduce Japan's exports to the US by about 2.2 trillion yen;

• Increasing imports of US agricultural products will increase Japan's imports from the US by 1.17 trillion yen;

• An annual increase of $3 billion in defense equipment imports, equivalent to 440 billion yen;

• Purchasing 100 Boeing aircraft will increase Japan's imports from the US by 2.4 trillion yen;

Nomura stated that the US-Japan agreement seems far from achieving the Trump administration's goal of completely eliminating Japan's trade surplus with the US.

In total, the measures in the agreement will reduce Japan's trade surplus with the US by 6.2 trillion yen, approximately 70% of the projected surplus of 8.6 trillion yen in 2024. Therefore, the agreement will not completely eliminate Japan's trade surplus with the United States.**

Considering that many of the import items in the agreement may have already been decided or would naturally increase even without a trade agreement, if we assume these factors halve the net growth of Japanese imports, then the reduction in Japan's trade surplus due to the agreement will drop to 48 trillion yen, only 56% of the 86 trillion yen surplus expected in 2024.

Japanese Pharmaceuticals and Semiconductors May Face New Tariff Threats

Nomura believes that since the agreement cannot completely eliminate Japan's trade surplus with the U.S., the Trump administration is likely to take additional measures against Japan, including further increasing export tariff rates on Japan, requesting Japan to voluntarily limit exports to the U.S., and asking Japan to expand imports from the United States.

According to CCTV News, Trump stated in a cabinet meeting that he is still planning to impose tariffs on specific industries, including pharmaceuticals, semiconductors, and metals. Last year's trade data showed that Japan's total pharmaceutical exports to the U.S. amounted to 410 billion yen, and semiconductor manufacturing equipment exports were 530 billion yen.

Nomura estimates:

According to the Trump tariffs outlined in the agreement with Japan, Japan's real GDP is expected to decline by about 0.55% within a year. This equates to a reduction of 3.3 trillion yen in Japan's nominal GDP. Given that the Japanese economy is still facing high price resistance, the 0.55% GDP decline caused by tariffs raises the probability of Japan's economy falling into recession by the end of 2026 to 50%.

Discrepancies Have Emerged Between the U.S. and Japan Regarding the Agreement

It is noteworthy that discrepancies have emerged between the U.S. and Japan regarding the content of the agreement. On July 23, the White House released a document titled "Fact Sheet: President Trump Achieves Unprecedented U.S.-Japan Strategic Trade and Investment Agreement."

The fact sheet states that Japan will "purchase billions of dollars more in U.S. defense equipment each year." However, Japan's Chief Cabinet Secretary Yoshihide Suga clearly stated in a press conference on July 24 that Japan has no plans for additional purchases.

Regarding the $550 billion investment plan, the fact sheet states that "Japan will invest $550 billion, guided by the U.S. to rebuild and expand core American industries," and claims that "under Trump's guidance, these funds will target the revitalization of America's strategic industrial base." This gives the impression that Japan is subordinate to the U.S. and is gifting funds to the latter, which is not the case.

Regarding the statement in the fact sheet that "the U.S. will retain 90% of the profits," Minister Akizawa explained that among the three measures of investment, loans, and loan guarantees, government-supported financial institution investments account for only 1-2% of the total, and the profits mentioned by the Trump administration are limited to this portion of the investment.

Nomura believes that these statements indicate that the White House's fact sheet does not accurately represent the content of the agreement between the two countries, but is written in a manner favorable to the Trump administration.