Tariff impacts on the US and Japanese economies expected to become more evident in 2H25; China risks slowdown if no additional stimulus
US
While US and China reached a preliminary trade deal, tariff effects could weigh on US economy. Headline inflation edged up slightly to 2.4% YoY in May from 2.3% the previous month. Core inflation held steady at 2.8%. Meanwhile, consumer confidence index improved to 60.5 in June, up from 52.2 in the prior month.
The latest trade deal with China included the lifting of restrictions on rare earth exports from China, which are critical to US industries such as electronics, electric vehicles, and defense manufacturing. However, the recent legal challenges to the Trump’s reciprocal tariffs could lead to changes in tariff measures. The future policy may involve tariff hikes on specific goods or countries under other laws such as Sections 232, 301, and 122, potentially impacting economic growth ahead. Krungsri Research expects the Fed to keep its policy rate unchanged at 4.50–4.75% at the June 17–18 meeting as it awaits clarity on trade policy development. Moreover, the intensifying conflict in the Middle East has driven energy prices higher, which could put upward pressure on inflation and complicate future monetary policy decisions.
Japan
Japan’s service sector may support economy in 2H25, but trade risks will pressure overall growth. Japanese 1Q25 GDP was revised up to a contraction of -0.2% YoY from the previous -0.7%, driven by stronger-than-expected consumption and inventory buildup. However, business sentiment among large enterprises fell from +2.0 1Q25 to -1.9 in 2Q25, marking the first contraction in five quarters, due to rising concerns over US tariff policy which has begun to affect the Japanese economy.
Looking ahead, Japan’s economy is expected to continue growing at a sluggish pace in 2025 despite supports from rising wages, subsidies on electricity and gas, the release of rice stockpiles to contain inflation, and ongoing recovery in services sector, especially tourism. Nevertheless, manufacturing and exports are expected to face pressure from US tariff policies, including reciprocal tariffs or product-specific tariffs, particularly in the automotive sector. As a result, Krungsri Research expects the BOJ to hold its policy rate unchanged to support the economic recovery, at least through the end of this year.
China
China’s economy continues to face both internal and external pressures. Headline inflation has remained below 1% YoY for 27 consecutive months, while the Producer Price Index (PPI) fell further, from -2.7% in April to -3.3% in May, marking more than 30 straight months of declines. Meanwhile, export growth slowed from 8.1% to 4.8%, with exports to the US falling deeper from -21% to -34.5%.
Recent inflation suggests that oversupply still weigh on China’s economy. Trade tensions also remain a major risk though reciprocal tariffs face legal challenges. The US may instead resort to other trade laws, such as expanding product coverage and raising tariff rates under Section 232. We found that enforcing Section 232 in such a manner could lead to China’s export losses of -3.1%, close to -3.4% resulting from the current tariffs. Moreover, the impact on certain sectors could worsen, such as Electronics and Electrical Equipment (1.7 times greater). This could weigh on China’s economic growth, given its more reliance on exports, reflected in a sharp increase in the export contribution to GDP growth from only 12% in 2Q24 to 40% in 1Q25.
Private consumption and tourism sectors continue to show signs of weakening.
Consumer confidence in May dropped to the lowest level in over two years, while the government is considering economic stimulus measures. The Consumer Confidence Index (CCI) declined for the fourth consecutive month in May to 54.2, the lowest level since April 2023, from 55.4 in April. The decline was affected by concerns over: (i) the slowdown in the Thai economy following the expiration of first-quarter stimulus measures, (ii) risks stemming from US tariff policies, and (iii) domestic political uncertainty.
The continued decline in consumer confidence signals a negative outlook for domestic spending. This concern is reinforced by the Private Consumption Index (PCI), which the BOT reported a contraction of -4.0% YoY in April PCI—its first decline in 16 months. This reflects mounting pressure on consumption from several factors, including slow income growth, high household debt, and US trade policies that could hit Thailand’s manufacturing and employment sectors. Although trade negotiations between Thailand and the US have shown initial progress, they remain in early stages and require close monitoring. Meanwhile, the government’s THB 157 bn economic stimulus package is still under review. Any delay in its implementation could undermine efforts to boost domestic demand, particularly in the second half of the year, when the economy is expected to face more severe headwinds.
Tourism sector becomes more vulnerable as both the number of visitors and tourism revenue declined. Chinese tourist arrivals remain sluggish. In May, a total of 2.27 mn foreign tourists arrived in Thailand, down from 2.55 mn in April and a -13.9% YoY decline. Tourism revenue generated during the month amounted to THB 95.8 bn, representing an -18.5% drop. The top five source countries for international arrivals were Malaysia, China, Russia, India, and South Korea. For the first five months of the year (January–May), Thailand recorded 14.36 mn foreign arrivals (-2.7% YoY), generating THB 673 bn in tourism revenue (-5.2%).
The recovery of Thailand’s tourism sector remains concerning, with Chinese tourist arrivals recently dropping to second place behind Malaysia. Key obstacles to the rebound of Chinese tourists include safety concerns and increasing competition from other tourist destinations. This situation poses a potential structural risk, as Chinese tourists previously accounted for the largest share—contributing as much as 28% of total foreign tourism revenue during pre-COVID period, compared to the current share of only 17% (in May 2025). Without urgent efforts to restore confidence and revive growth, the tourism sector may struggle to maintain its role as a key engine driving the Thai economy.
