Japan records a 5th straight yearly trade deficit

Japan’s trade deficit persisted for the fifth consecutive year in 2025, according to government data released Thursday, as the nation grapples with the dual challenges of U.S. tariffs and deteriorating relations with China.

The Finance Ministry’s preliminary report shows Japan recorded a 2.65 trillion yen ($17 billion) trade deficit for the full year, though this represents a significant improvement—nearly 53% smaller than the previous year’s shortfall. The modest economic recovery was supported by a 3.1% increase in exports, while imports remained relatively stagnant with less than 1% growth year-on-year.

For December alone, Japan posted a trade surplus of 105.7 billion yen ($669 million), though this was 12% lower than the same month a year earlier. December’s trade activity showed imports growing at 5.3%, slightly outpacing export growth of 5.1%.

The country’s export sector has faced significant headwinds, particularly in its crucial U.S. market, where December exports declined by 11%. This downturn coincides with the Trump administration’s implementation of a 15% tariff on most Japanese imports—a reduction from the initially proposed 25% but still substantially higher than pre-Trump rates. The tariffs are part of a broader protectionist trade policy that has disrupted traditional trade relationships between the longtime allies.

While U.S.-bound exports struggled, Japan saw more positive performance in other markets, with exports to Britain, Africa, and several Asian countries showing growth. European imports remained robust, helping to partially offset the American decline.

Adding to Japan’s economic challenges is an emerging dispute with China over rare earth materials, which are critical components for Japanese manufacturing, particularly in the automotive and electronics sectors. Beijing has implemented export controls on these strategic materials following controversial comments by Japanese Prime Minister Sanae Takaichi.

The diplomatic tension escalated after Takaichi suggested that a Chinese military move against Taiwan could trigger a Japanese military response. China’s subsequent restrictions on rare earth exports represent a significant threat to Japan’s manufacturing sector, which depends heavily on these materials for high-tech production.

Against this backdrop of international trade tensions, Prime Minister Takaichi has called for snap elections next month, seeking to strengthen her party’s position in Parliament while her public approval ratings remain favorable. The move comes at a critical juncture for Japan’s economy as it navigates geopolitical challenges and trade disruptions.

Despite these international pressures, Japan’s domestic economy has demonstrated resilience. The Tokyo Stock Exchange’s benchmark Nikkei index continues to reach new record highs, reflecting investor confidence in the market despite the ongoing trade challenges.

However, public sentiment remains mixed, with many Japanese citizens expressing frustration over persistent inflation and stagnant wages. This economic squeeze on everyday consumers contrasts sharply with the bullish stock market, creating potential political vulnerability that Takaichi likely hopes to address before economic conditions potentially worsen.

The trade data highlights Japan’s delicate position in the shifting global economic landscape, caught between its security alliance with the United States and its economic interdependence with China. As both relationships face strain, Japanese policymakers must navigate carefully to protect the nation’s economic interests while maintaining crucial international partnerships.

Analysts suggest that diversifying trade partners and reducing dependency on both the U.S. and Chinese markets will be essential strategies for Japan moving forward, particularly as geopolitical tensions in East Asia show little sign of abating.