Top manufacturers are concerned the dispute between China and the US will hurt their supply chains and markets.

Tokyo, Japan – United States President Donald Trump visits Japan this weekend, a trip marked by pomp and ceremony. He’s due to attend a sumo match, play golf with Prime Minister Shinzo Abe and meet newly-crowned Emperor Naruhito.

But there’s also likely to be more than a little anxiety around his visit, at least on the part of some of Japan’s top companies.

Analysts say these firms are likely to be holding their collective breath as they look for any signs of improvement in an already tense economic relationship, or prepare for a deterioration in it.

Top Japanese manufacturers and exporters are growing increasingly concerned that the ongoing trade war between China and the US – which has escalated over the past two weeks – could lead to an economic slowdown in China, impacting the global economy and their businesses.

For instance, the Bank of Japan’s closely watched quarterly “tankan” manufacturer’s sentiment gauge fell to a two-year low in March as companies felt the pinch from falling demand for electronic parts, cars and machinery goods.

China is a critical market for Japanese companies. Out of the total 81.5 trillion yen ($740bn) in Japanese exports in 2018, 15.9 trillion yen ($143.9bn) went to China and 15.5 trillion yen ($140.3bn) went to the US. Japan’s third largest export destination was South Korea.

Risky times

Japanese companies face two main risks.

Manufacturers with operations in China could see disruptions to their supply chains because of restrictions by the US government that limit their ability to move products from China to the US.

In addition, Japanese exporting firms could be hit by a drop in demand in China and the US as the trade war slows growth in both countries, analysts say.

“The degree of the impact of the trade war varies by company. Considering the trade war may continue for the foreseeable future, more of Japanese manufacturing companies are starting to reconsider their supply chain,” said Ryoji Watanabe, a senior analyst at the Washington, DC office of Sumitomo Corporation, a global trading company. “The increase of tariffs for the third tranche ($200 billion worth of Chinese goods) from 10 percent to 25 percent would accelerate the shift.”

Analysts say some Japanese companies are planning to relocate factories out of China [EPA]

Some Japanese manufacturers are already considering shifting some Chinese operations to Southeast Asia to avoid US sanctions, he told Al Jazeera.

“Some others are considering shifting their production to Japan, Mexico or the United States.”

Last week, the US Commerce Department blocked Huawei from buying US components, saying it was involved in activities that are “contrary to national security.” Other Chinese companies, such as Hikvision , may join Huawei on the Commerce Department’s so-called “Entity List,” according to media reports.

Analysts say Japanese firms are scrambling to work out how these restrictions may affect them.

A case in point is Japanese conglomerate Panasonic, which this week reportedly issued a pair of conflicting statements. Various media, including the BBC and Reuters, reported that, in an internal memo, the company had announced plans to stop supplying Huawei. Shortly after the reports came out on May 23, the company published a statement on its China website that it planned to continue supplying Huawei normally.

Trump this week announced a 90-day reprieve on the measures against Huawei to allow it to service existing clients, but the danger remains.

Difficult to plan ahead

“Above all, uncertainty involving the U.S.-China trade war is a major concern for Japanese companies,” Watanabe said. “It is difficult for Japanese companies to plan ahead, and they may simply hold off on new investment decisions until the outcome of trade war becomes clearer.”

Kiyoyuki Seguchi, research director of the Canon Institute for Global Studies, says it’s difficult to quantify the full impact of the trade war on Japanese firms at this point in the negotiations.

“Trump is unpredictable so we won’t know what the concrete results will be when he visits Japan later this month,” he told Al Jazeera. “Since Japan is an ally of the US, Trump should respect this when he meets with Japan’s Prime Minister Shinzo Abe.”

Meanwhile, Abe is facing his own political issues. He is under pressure from his Liberal Democratic Party to focus on the economy, possibly making it difficult to compromise on sectors such as agriculture and vehicles that are critical for the Japanese economy and politics, according to Seguchi.

Toyota Motor Corp. recently rebuked President Donald Trump’s declaration that imported cars threaten US national security, signaling contentious talks are ahead for the White House and America’s key trading partners. The White House set a 180-day deadline for negotiating deals with Japan, the European Union and other major auto exporters.

Toyota says Trump’s attempt to reduce foreign car imports signals its investments in the US are ‘not welcomed’ [File: Kevork Djansezian/Getty Images/AFP]

In an unusually strongly worded statement, Japan’s largest automaker said Trump’s proclamation that the US needs to defend itself against foreign cars and components “sends a message to Toyota that our investments are not welcomed.”

The company said it has invested more than $60bn building operations in the US, including 10 manufacturing plants, and employs more than 475,000 people.

Toyota said it remains hopeful that the negotiations can be resolved quickly but warned that curbing imports would force US consumers to pay more and be counterproductive for jobs and the American economy. The company’s critique comes two months after its pledge to add US$3 billion to a years-long US investment plan.

Light at the end of the tunnel?

But there are signs that compromise between the US and Japan is possible.

In the agriculture market, Japan agreed to lift long standing import restrictions on American beef, opening the way for products to enter the market regardless of the age of the meat, the US Department of Agriculture announced on May 17. Japan has barred imports of US beef over 30 months old since 2005 in response to the outbreak of mad cow disease.

The US Meat Export Federation estimates that expanded access could increase US beef sales to Japan 7 percent to 10 percent.

According to the Canon Institute’s Seguchi, many US companies don’t want to follow Trump down this confrontational rabbit hole. He advises Japanese firms to follow their example.