ANALYSIS - Japan's Ishiba departs G7 with US trade deal and political future in doubt

Ishiba traveled to the G7 summit in Canada hoping a direct appeal might get talks back on track after Japanese negotiators struggled to secure respite on a 25% tariff imposed on imported cars, according to two officials with knowledge of the matter.

While the sun beamed down as Ishiba and Trump reclined in lounge chairs in the foothills of the Canadian Rockies, Monday's brief encounter did little to alter the grim forecast for Japanese industry girding for broader 24% levies due on July 9.

The lack of progress could knock confidence in Ishiba's diplomacy just as he prepares to contest a dicey upper house election next month that some political analysts say could result in his ouster.

"Despite our persistent efforts to find common ground through serious discussions, yesterday's meeting with President Trump confirmed that we still have discrepancies in our understanding," Ishiba told reporters on Tuesday before his departure from Canada.

Trump earlier told reporters aboard Air Force One that "there was a chance of a deal" but appeared in little mood to cede ground. "Ultimately you have to understand we're just going to send a letter saying this is what you're going to pay otherwise you don't have to do business with us," he said.

CAR TROUBLE

The most pressing issue for Japan has been the impact of Trump's tariffs on its auto sector, which employs nearly one in 10 of the country's workers and accounts for a fifth of exports.

Japan's overall exports fell in May for the first time in eight months, piling pressure on its fragile economy, the world's fourth largest.

Toyota Motor Corp 7203.T, Japan's leading car company, has already flagged that tariffs have likely sliced off 180 billion yen ($1.2 billion) from its profit in April and May alone. Honda 7267.T has said it expects a 650 billion yen ($4.5 billion) hit to its earnings this year from tariffs in the U.S. and elsewhere, while Mazda Motor 7261.T declined to issue a full-year profit forecast, citing uncertainty due to tariffs.

Publicly, Ishiba's government has said it aims to win total exemption from Trump's auto tariffs, but behind the scenes its negotiators had been trying to convince Washington to knock them down to around 10%, the sources said, requesting anonymity due to the sensitivity of the matter.

Trump's trade deal with Britain, where he agreed to allow a quota of cars to be subject to a lower 10% levy has provided somewhat of a template, although Japan is a far larger exporter of cars to the United States.

In exchange for relief on the autos sector, Tokyo had pledged to step up purchases of U.S. gas and other items to rebalance a trade deficit that has long irked Trump.

But just days before Ishiba was due to arrive in Kananaskis, Canada for the G7 summit, it became clear to Japan's negotiators that Washington was unwilling to budge, said one of the sources.

DIPLOMATIC SKILL

Ishiba likely miscalculated by raising expectation of an agreement with Trump, said Kenji Minemura, a senior researcher at the Canon Institute for Global Studies.

He will now have put a trade deal aside and focus on convincing Trump to extend the pause on the broader reciprocal levies, a senior lawmaker close to the premier said.

Otherwise, Ishiba faces the prospect of contesting elections next month with the full force of Trump's tariffs in effect. The combined tariffs could shave nearly 1% off Japan's gross domestic product, Mizuho Research & Technologies has estimated.

"The fact that nothing was agreed at the summit could raise doubts about the diplomatic skills of the Ishiba administration," said Hiroshi Shiratori, professor of contemporary political analysis at Hosei University.

His ruling coalition may struggle to hold on to its majority in the upper house vote, a repeat of the result in the more powerful lower house election in October, which could potentially trigger his ouster, political analysts say.

Even if the LDP limps on in minority rule, there is around a 70% chance the party would replace its leader, said Michael Cucek, a political science professor at Temple University in Tokyo.

"If they do have a significant loss then Ishiba has to go. You can't lose two elections in a row," he said.

Ishiba may get another chance to make progress with Trump later this month with the two leaders due to attend the two-day NATO summit in the Hague from June 24.

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