Tariff pressures on the U.S. and Japan are set to intensify in late 2025 amid trade tensions, inflation, and shifting policies. China faces mounting risks of a deeper slowdown without fresh stimulus, as exports weaken and consumer confidence erodes.
Key takeaways
- Tariff effects on the U.S. and Japan are set to intensify by late 2025, with trade policy uncertainty, inflation pressures, and legal shifts clouding the economic outlook for both countries.
- China faces a growing risk of economic slowdown as exports slump, deflation persists, and consumer sentiment weakens, threatening the recovery of domestic consumption and tourism.
- Regional economies like Thailand are already feeling the ripple effects, with falling tourist arrivals, weakening spending, and delayed stimulus exposing vulnerabilities to China’s slowdown and global trade tensions.
United States
Although the U.S. and China have reached a preliminary trade deal, including China lifting restrictions on rare earth exports critical to U.S. industries, the economic impact of existing tariffs remains a concern. Headline inflation rose slightly to 2.4% year-on-year in May, while core inflation held steady at 2.8%. Despite these pressures, consumer confidence improved in June, climbing to 60.5 from 52.2 the previous month.
Legal challenges to tariffs introduced during the Trump administration could prompt changes in trade policy, with new measures potentially emerging under Sections 232, 301, or 122. These shifts may target specific goods or regions, adding further uncertainty for businesses. The Federal Reserve is expected to hold its policy rate steady at 4.50–4.75% at its June 17–18 meeting, as it awaits greater clarity on trade developments. Meanwhile, heightened geopolitical conflict in the Middle East has pushed energy prices higher, complicating inflation management and clouding the outlook for monetary policy.
Japan
Japan’s economy is expected to see only modest growth in the second half of 2025, supported by a recovery in services, especially tourism, alongside wage increases, energy subsidies, and measures to curb food prices. The revised GDP figure for the first quarter of 2025 showed a narrower contraction of -0.2% year-on-year, up from an earlier estimate of -0.7%, driven by better-than-expected household consumption and inventory accumulation.
However, business sentiment among large firms fell into negative territory for the first time in five quarters, dropping from +2.0 in Q1 to -1.9 in Q2, largely due to concerns over the U.S. tariff stance. Japan’s export sector, particularly in automobiles and electronics, remains vulnerable to the escalation of U.S. trade actions. In response, the Bank of Japan is expected to maintain its accommodative policy stance through the end of 2025 to support the fragile recovery.
China
China continues to face mounting economic challenges from both internal and external sources. Inflation remains persistently weak, with headline CPI below 1% year-on-year for 27 consecutive months, and producer prices falling further to -3.3% in May, the 30th straight month of decline. Export growth slowed to 4.8% in May from 8.1% in April, with shipments to the U.S. plunging by 34.5% year-on-year.
The effects of oversupply and weakening external demand continue to suppress prices and dampen industrial activity. While reciprocal tariffs may be facing legal scrutiny, the U.S. could still impose new trade barriers using Section 232 or other mechanisms. Such measures could cut Chinese exports by an estimated 3.1%, a comparable hit to that caused by existing tariffs, and disproportionately impact sectors like electronics and electrical equipment.
China’s export contribution to GDP surged to 40% in Q1 2025, up from just 12% in Q2 2024, underscoring the economy’s growing dependence on external demand. This leaves the country highly exposed to trade shocks. At the same time, domestic demand continues to weaken. Consumer confidence in May dropped to a 25-month low of 54.2, marking a fourth consecutive monthly decline, while the Private Consumption Index contracted -4.0% year-on-year in April, the first drop in 16 months. Factors behind the decline include fading stimulus effects, political uncertainty, and rising concerns over the impact of global trade conflicts.
Thailand’s Exposure Reflects Regional Spillovers
Thailand’s economy illustrates how China’s slowdown and global tariff pressures are rippling across the region. The country’s tourism sector, a key growth engine, remains fragile. Foreign tourist arrivals fell from 2.55 million in April to 2.27 million in May, a 13.9% year-on-year decline. Revenue also dropped 18.5% to THB 95.8 billion during the month. Chinese arrivals continue to lag, slipping behind Malaysia as the top source market. Safety concerns and growing competition from other destinations are keeping Chinese travelers away, with their share of Thailand’s total tourism revenue down from 28% pre-pandemic to just 17% in May 2025.
The government is weighing a THB 157 billion stimulus package, but delays could further dampen consumer sentiment and spending. If implemented swiftly, it could help cushion the economy from external shocks expected later in the year.
Outlook
With tariffs set to reshape global trade dynamics more forcefully by late 2025, both the U.S. and Japanese economies are bracing for a period of increased uncertainty. For China, the risk of inaction could deepen a slowdown already visible across key economic indicators. The cascading effects, seen in weaker exports, slower tourism, and depressed consumption, highlight the fragility of post-pandemic recoveries across Asia.
To navigate this challenging environment, policymakers will need to balance monetary support with targeted stimulus while reassessing trade alliances and supply chain strategies. Without a coordinated global response, economic fragmentation and instability could intensify in the months ahead.
