Trade talks alone won’t move American cars in Japan

• US-Japan trade deal sets tariffs on Japanese cars imported to the US at 15%.

• The Japanese auto market favors A- and B-segment vehicles, for size, efficiency and tax purposes. US automakers do not meaningfully compete in those segments.  

• Japanese consumers demonstrate strong loyalty to home-market auto brands, due in part to robust service and support networks.  

• Regulatory barriers have included Japan’s more strict safety and emissions standards and testing required of imported vehicles, as well as complexities of local regulations.

US automakers have not performed well in the Japanese market for several reasons. In the US-Japan trade negotiations, President Trump set an objective of making the Japanese market more accessible to US-produced vehicles, as well as working to encourage increased US investment.  

While there are non-tariff trade barriers, some challenges are related to market differences and the historic development of the auto industries in Japan and the United States.  

Why American cars in Japan will still face uphill battles

Even with new trade terms, a greater presence for American cars in Japan will be held back by deep-rooted consumer preferences and structural challenges.

1. Brand loyalty to domestic manufacturers. 

Japanese consumers exhibit a strong loyalty to local brands such as Toyota, Honda, Nissan, and Subaru. This loyalty is deeply rooted in cultural pride and a long-standing belief in the superiority of Japanese products. Many Japanese consumers perceive domestic vehicles as being of higher quality, reliability, and innovation compared to foreign brands.

2. Preference for Kei cars. 

Kei cars are small, lightweight vehicles specifically designed for the Japanese market. These cars are fuel-efficient, inexpensive, and ideal for navigating Japan's narrow streets and limited parking spaces and benefit from being taxed at a lower rate. Japanese regulations dictate the maximum size and power of these vehicles.  

Kei cars are too small to be viable in the US or most other markets; as a result, most automakers, including US automakers, have not invested in developing vehicles to those specifications. Japan’s creation of a class of vehicle incentivized through lower taxes but too small for most other global markets can be a non-tariff trade barrier. 

Kei cars are firmly in the A segment. American cars are typically larger and do not align with the preferences of Japanese consumers.

But it is not only that US automakers tend to build larger vehicles.  Japan’s auto market is structurally different from the global market, offering a degree of insulation from international competition. More than 60% of light-vehicle sales in Japan fall into the A and B segments. In contrast, over 60% of global light-vehicle sales are in the larger C and D segments, which not only provide greater sales volume worldwide but also offer higher profit margins.  

Further, there is a substantive mismatch between the Japanese market demand and the vehicles currently produced in the US. In 2024, no A- or B-segment vehicles were produced in the US and 81% of light-vehicle production comprised C- and D-segment vehicles

This mismatch between what US automakers typically produce for the global market and what Japanese consumers prefer continues to limit American brands’ competitiveness in Japan, regardless of improvements in Japan trade access.

3. Limited service network and support. 

The lack of an extensive service and support network for American brands in Japan poses another barrier to entry. As common to other markets, Japanese consumers prioritize accessibility to service centers and parts availability.  

4. Right-hand drive versus left-hand drive.

US automakers primarily design their vehicles for left-hand drive markets. Producing right-hand drive vehicles is feasible, but the complexity can further diminish profitability for small cars needed in relatively low volume, making the effort less attractive.

5. Regulatory and market barriers. 

Japan's regulatory environment traditionally has been a hurdle for American automakers. Stricter emissions standards and safety regulations may require significant modifications to vehicles designed for the US market; this is addressed in the new US-Japan trade agreement.  

Now, vehicles meeting US safety standards will be accepted by Japanese safety regulators. It will remain true that the complexities associated with navigating the Japanese market, including distribution channels and compliance with local regulations, can deter American manufacturers from investing. Moreover, an annual automobile tax, which is based on the vehicle's engine displacement, can elevate the cost of ownership for American cars with larger engines and Japan does have a 10% consumption tax, or value-added tax, on imported goods.  

It is not clear what impact the Japan trade agreement will have, if any, on the Japan consumption tax.

From the end of World War II until around 1995, Japan restricted US automakers from investing in local plants and made market participation extremely challenging. While Japan began to allow its auto market to be more open around 30 years ago, foreign automakers have not made significant inroads. 

While the home-market industry was being developed, Japanese automakers cultivated a significant export business. Japanese automakers have achieved greater profitability, experience, and robust product development than they would have by relying solely on their domestic market.  

US automakers have found investing in the A and B segments favored by Japanese consumers to be consistently unprofitable. Japanese automakers recognized the profitability of larger segments on the global stage and invested in exportable segments and built-up strong manufacturing in markets outside of Japan, while supporting domestic market needs with local production.