Toyota, the world's top-selling carmaker, halted domestic shipments of three models this week as a government testing scandal enveloped the auto industry in Japan.

Along with rivals Honda, Mazda, Suzuki and Yamaha, Toyota is accused of failing to follow standardized steps when certifying new car models before they go into mass production. The firm's headquarters were raided by Transport Ministry officials on June 4.

The scandal has already hit sales of Japanese vehicles amid intense competition in the global auto sector. It comes just months after China overtook Japan to become the world's largest car exporter, partly due to booming sales of electric vehicles (EVs).

A similar scandal knocked Volkswagen's reputation and sales in 2015, after the German auto giant admitted it had installed illegal software that cheated emissions tests.

Dieselgate, the largest and most expensive auto disgrace in history, cost VW over $30 billion in fines and damages and had an impact on several other carmakers.

How did Japan's safety scandal unfold?

Toyota subsidiary Daihatsu was first hit by accusations of wrongdoing in December. The carmaker, best known for its compact and mini-sized vehicles, admitted to widespread manipulation of tests dating back to the late 1980s, including engine and crash performance, affecting 64 models.

Daihatsu halted all production in Japan for several months as a result of the inquiry and replaced its chief executive.

By April, Japan's Transport Ministry had verified that all Daihatsu production vehicles now met official safety standards and lifted the ban on shipments.

The Transport Ministry then ordered other automakers and parts suppliers to review test results from the previous decade and report any breaches related to the certification of their vehicles. A total of 85 companies were ordered to comply, including Toyota.

How are other Japanese carmakers implicated?

Toyota has now admitted to massive cheating on certification tests for seven models sold domestically during six assessments conducted in 2014, 2015 and 2020.

The carmaker said the cheating involved the use of inadequate or outdated data in collision tests, as well as incorrect testing of airbag inflation and rear-seat damage in crashes.

In one example, collision damage was measured on one side of a model's hood instead of both, as required. Emissions tests also were found to have been falsified.

Some of the models found with faulty tests had already been discontinued.

Production of three models, the Corolla Fielder, Corolla Axio and Yaris Cross, has been temporarily suspended. The issue does not affect Toyota's overseas production.

Rival Mazda this week admitted to similar irregular certification testing — notably the use of incorrect engine control software during assessments, as well as crash test violations on three discontinued models.

Production of two models, the Roadster and Mazda 2, has been paused.  

Honda said it had found wrongdoing in noise and output tests over eight years on dozens of discontinued models.

Yamaha admitted falsifying data involving noise-level tests on at least three motorbike models.

How does Japan's scandal compare with Dieselgate?

Though industry insiders said the trouble facing Toyota and its Japanese rivals resembles VW's debacle nearly a decade ago, Dieselgate was much worse.

"Dieselgate was a criminal case of extreme cheating of US environmental laws," Ferdinand Dudenhöffer of Ferdy Research, and the former director of Germany's Center for Automotive Research, told DW. "In this way, the Japanese safety scandal is not comparable."

VW was found to have violated the US Clean Air Act by intentionally programming diesel engines to activate their emissions controls only during laboratory testing.

The measure caused the vehicles to meet US standards for nitrogen oxide (NOx) output when, in fact, they emitted up to 40 times more NOx during normal driving.

VW was then investigated in multiple other countries and received billion-dollar fines by governments and compensation claims from owners of the 11 million vehicles fitted with the illegal device.

Dudenhöffer noted how "carmakers often make recalls over safety issues," adding that Toyota, Mazda and Nissan were affected by another scandal a decade ago that involved airbags rupturing in crashes.

"Dieselgate certainly had an impact on Volkswagen's sales initially. But it faded fairly quickly because the vehicles are so popular," Felipe Munoz, senior analyst at the London-based auto research house JATO Dynamics, told DW. "A year later, VW's sales were growing again."

Munoz thinks  any impact on Japanese car sales will be temporary but could hurt smaller players more than Toyota.

"Toyota has a very good reputation. It's the most global car brand in the world. I don't think this scandal will have a long-lasting impact on sales," he added.

Even so, the testing cover-up is a major setback for Toyota, which gained a competitive edge for decades for producing high-quality cars and setting the standard for durability and long-term resale value.

Toyota has also benefited from a strategy of producing hybrid cars (powered by both the combustion engine and electric battery), rather than purely electric models. This has produced huge profits as many consumers are still wary of battery range anxiety and the future resale value of EVs.

The firm now risks falling behind its Chinese rivals, which have fully embraced EVs and saw their exports skyrocket by 64% last year compared with 2022.

What happens next?

Japan's Transport Ministry said it was conducting on-site inspections at Toyota's headquarters, as well as those of four other automakers.

"We will carry out on-site inspections" at each of the companies, Transport Minister Tetsuo Saito told reporters on June 4.

"These acts erode the trust of vehicle users and shake the very foundation of the vehicle certification system. It is extremely regrettable," he said.

The investigation could take several months, and the financial impact of the scandal is yet to be fully assessed.

Chief Cabinet Secretary Yoshimasa Hayashi hoped that the impact would be "minimal." He added that the government would take measures to lessen the economic damage

While apologizing on June 3, Toyota Chairman Akio Toyoda said some certification rules might be overly stringent, but insisted he wasn't condoning the violations.

He said the firm might have taken shortcuts in its testing process at a time when it was developing several new models.

"We are not a perfect company. But, if we see anything wrong, we will take a step back and keep trying to correct it," Toyoda said.

Edited by: Ashutosh Pandey