By Leika Kihara

TOKYO (Reuters) – Japan’s trade deal with the U.S. must include tariff concessions for its vital automobile industry, top trade negotiator Ryosei Akazawa said on Tuesday, after President Donald Trump announced 25% tariffs on goods from Japan starting August 1.

Akazawa reported a 40-minute phone conversation with U.S. Commerce Secretary Howard Lutnick, where both parties agreed to “actively” continue negotiations.

> “We are trying to agree on a package of measures” ranging from expanded trade, non-tariff barriers, and cooperation on key economic security issues, Akazawa said at a news conference.

> “The two countries must garner trust through sincere dialogue, and reach common ground step by step. Through such a process, my job as negotiator is to agree on a full package as soon as possible.”

Trump on Monday began notifying trade partners of steep U.S. tariff hikes, but later indicated a willingness to delay implementation if countries made acceptable proposals. He also signed an executive order to postpone the tariffs until August 1.

Akazawa noted that Japan had no deadline in mind, including August 1, when reaching a deal with the U.S., and would not sacrifice Japan’s agriculture sector for an early agreement.

He emphasized that protecting the automobile sector, a mainstay of Japan’s export-reliant economy hit with 25% tariffs, was among his top priorities.

> “There’s no point striking a deal with the U.S. without an agreement on automobile tariffs,” Akazawa said.

Uncertainty regarding tariffs sent the dollar to a two-week high of 146.44 yen on fading expectations of a hawkish quarterly report from the Bank of Japan on July 31, which would have laid the groundwork for an interest rate hike this year.

> “If the new deadline is set on August 1, the BOJ probably won’t be able to say much at the upcoming report in July,” said Takeshi Ishida, a strategist at Kansai Mirai Bank. “Market expectations of a near-term rate hike will be rolled back.”

In a press conference on Tuesday, Finance Minister Katsunobu Kato stated he had no immediate plans to discuss exchange rate matters with U.S. Treasury Secretary Scott Bessent.

ECONOMIC IMPACT

Japan failed to reach a deal with the U.S. before the July 9 expiration of Trump’s temporary pause on his “reciprocal” tariffs, after focusing on eliminating automobile levies.

With an upper house election on July 20, Prime Minister Shigeru Ishiba has stated that Japan will not make “easy concessions” for an early deal with Washington.

Recent media polls indicate Ishiba’s ruling coalition may struggle to maintain a majority in the upper house, which could complicate trade negotiations according to analysts.

U.S. tariffs also add challenges for Japan’s economy, which shrank in the first quarter.

> “There’s now a chance Japan could slide into recession,” said Yoshiki Shinke, an economist at Dai-ichi Life Research Institute, predicting that 25% tariffs will reduce Japan’s annual economic growth by 0.7 percentage points.