Q&A: Japan’s G7 Economic Diplomacy—Tariffs, Inflation, and Market Implications (EBC Analysis)

As the G7 summit convenes in Canada, Japan is taking a proactive role in global economic diplomacy—navigating U.S. tariff negotiations, domestic inflation, and new avenues for international cooperation. EBC Financial Group answers key questions about Japan’s evolving strategy, market signals, and what investors should watch as the summit unfolds.

How is Japan reframing tariff tensions with the U.S.?

Japan is shifting from a stance of concern to one of active, results-oriented negotiation regarding U.S. tariffs, particularly the 25% levy on Japanese automobile exports. Prime Minister Shigeru Ishiba, who previously called the tariffs a “national crisis,” is now focused on securing progress through direct talks. Chief trade negotiator Ryosei Akazawa recently returned from Washington after briefing Ishiba on ongoing discussions with U.S. officials. Both countries are aiming to announce meaningful outcomes at the G7 summit, with Japan proposing expanded cooperation in areas like shipbuilding, Arctic navigation, and military vessel repair to convert trade tensions into long-term strategic alignment.

What are the key G7 agenda items for Japan?

Japan’s G7 agenda goes beyond immediate trade disputes. Tokyo is advocating for deeper economic and strategic cooperation with the U.S. in sectors such as shipbuilding, Arctic maritime navigation, and military vessel maintenance. These initiatives are designed to foster economic interdependence and stable supply chains, reflecting Japan’s broader objective of converting short-term trade friction into durable bilateral and multilateral partnerships. Investors are watching for signs of diplomatic progress and coordinated policy responses among the G7 economies.

How is domestic inflation affecting policy?

Japan’s internal economic pressures are intensifying, with core consumer inflation accelerating to 3.5% in April—the fastest annual increase in more than two years. Food prices surged 7%, and rice prices nearly doubled year-over-year, marking the steepest rise in five decades. This inflation complicates the Bank of Japan’s policy stance. After raising short-term rates to 0.5% in January and holding steady in May, the central bank now faces the challenge of containing rising prices while supporting growth amid trade headwinds.

What’s happening with the yen?

The Japanese yen has appreciated against the U.S. dollar following the latest inflation data, with the USD/JPY pair falling below 144.00 and nearing 143.00 in recent trading. This currency movement reflects both market reactions to domestic inflation and the evolving expectations for Bank of Japan policy. Yen volatility is likely to remain elevated as investors assess the outcome of the G7 summit and further policy signals from Tokyo.

What should investors watch at the summit?

EBC Financial Group advises investors to monitor several key areas at the G7 summit:

• The outcome of Japan-U.S. tariff negotiations, which could impact autos, auto parts, and industrial sectors.

• Announcements on expanded cooperation in shipbuilding, rare earth supply chains, and economic security.

• Signals of coordinated policy action among G7 economies, especially regarding inflation and protectionism.

• Ongoing yen volatility and its effects on Japanese exporters and equity markets.

As David Barrett, CEO of EBC Financial Group (UK) Ltd, notes, “Japan’s inflationary backdrop and trade tensions with the U.S. reflect the broader recalibration underway in global economic policy. As Tokyo seeks strategic alignment at the G7, investors should stay focused on long-term fundamentals in an increasingly multipolar economic environment.”