BERLIN/BRUSSELS/NAGOYA, Japan -- Tokyo faces long odds on inclusion in a European Union electric-vehicle incentive plan that poses a risk of falling sales for Japanese automakers if they remain shut out.

In a meeting Wednesday with German Chancellor Friedrich Merz in Tokyo, Japanese Prime Minister Sanae Takaichi called for changes to the EU's Industrial Accelerator Act (IAA).

Proposed by the European Commission in March, the IAA would offer subsidies and other support to companies that make EVs and source components in the EU.

Germany and France on Oct. 16 announced a deal to extend "Made in EU" rules to cover partner countries that participated in the EU single market as of Jan. 1, 2020, in addition to the 27 member states, as long as certain conditions are met. While the U.K. is expected to be included, Japan and South Korea were not mentioned.

The IAA announcement alarmed Japan's government and automotive industry. EVs account for about 5% of Toyota Motor's sales volume in Europe, including the U.K., equating to more than 50,000 vehicles.

The Japanese government and private-sector companies including Toyota have called for Japan to be included among the countries qualifying for IAA subsidies.

When Takaichi met with European Commission President Ursula von der Leyen in June on the sidelines of the Group of Seven summit in France, Japan's leader conveyed her concerns over the prospect that Japanese automakers would be excluded.

Minister of Economy, Trade and Industry Ryosei Akazawa also sought changes to the IAA when he visited Brussels in May to meet with his EU counterpart, Stephane Sejourne, the European Commission's executive vice president for prosperity and industrial strategy.

But these preliminary efforts were unsuccessful. One challenge for Tokyo's side was the limited European sales for Japanese automakers other than Toyota, making it difficult for the private sector to present a united front.

France in particular has insisted on subsidies for EVs made in Europe. Unlike German automakers that have a big presence in international markets, Renault and other French players rely heavily on sales in the EU, so France has leaned toward protecting its domestic industry.

In Europe, companies often lease cars to employees as part of their compensation packages. Such "company cars" are eligible for tax breaks and purchase subsidies. They account for roughly 60% of the European market and are a key source of sales for Japanese automakers.

EVs will account for more than 90% of the European market in the 2030s, according to some forecasts. Toyota plans to build EVs at a plant in the Czech Republic by 2028. But for now, the company relies primarily on exports from Japan.

"Toyota is not a guest in Europe," said Yoshihiro Nakata, CEO of Toyota Motor Europe, arguing that the company was an important contributor to the European automotive industry.

Japanese automakers began exporting vehicles to Europe in the 1960s. In 1968, Toyota began assembling the Corolla in Portugal with a local partner. In the 1980s and 1990s, Toyota, Nissan Motor, and Honda Motor built factories in the U.K., while Suzuki Motor opened a plant in Hungary. During that time span, Japanese carmakers created roughly 170,000 jobs in Europe and established supply chains and sales networks.

Based on the agreement between Germany and France, EU institutions will begin finalizing the IAA proposal. There remains a possibility that the draft legislation may be amended in part during this process.

In July 2025, Japan and the EU inaugurated a Competitiveness Alliance meant to promote trade, investment and stronger supply chains in response to U.S. protectionism, Chinese overcapacity and other shared concerns. It remains to be seen how the outcome of the IAA discussions will affect such cooperation.