Quick View: Will trade negotiations bring some relief for Japan?
Junichi Inoue, Head of Japanese Equities, contemplates the implications of tariffs on Japanese companies and questions whether the complexities of trade negotiations will lead to a positive outcome.
4 minute read
Key takeaways:
- Japanese markets were caught off guard by the high tariffs imposed by President Trump, undermining Japan’s long-standing relationship with the US, with financials bearing the brunt of the sell off.
- While current trade negotiations have sparked a relief rally, it is questionable whether an agreement can be struck given various factors at play.
- Amid the ongoing market turbulence, investors have a chance to re-evaluate their portfolios and look for stock-picking opportunities.
People hate to think about bad things happening, so they always underestimate their likelihood.
“The Big Short”
In my view, this quote from the movie “The Big Short” best illustrates what is happening in the markets right now. President Trump’s worse-than-expected tariff policies announcement caused the TOPIX to fall by around 14% in yen terms over three days following the news.1
An unwelcome surprise
The introduction of high tariffs of 24% on Japanese goods caught the market unawares as there were expectations that trade issues could be resolved through ongoing negotiations. Also surprising was that financials had led the sell off, even though the sector is not directly related to trade. Possible reasons for this could be that financials would suffer from the increased risk of a global economic downturn, which would postpone the likelihood of another rate hike by the Bank of Japan. Moreover, the strong year-to-date return for the sector had created a crowded position among investors, leading to forced selling.
However, I believe that we should see some reversal of the market’s over-reaction on the impact on financial stocks as near-term domestic factors such as real wages growth and businesses planning for price hikes looks supportive for a rise in inflation.
Will trade negotiations bear fruit for Japan?
On 8 April, the widely anticipated Prime Minister Ishiba – President Trump call took place, with relevant ministers appointed to seek a resolution, sparking a relief rally.
At this stage, it is premature to assume that the situation has stabilised. If the aim of the policy for the US is to secure a budget for tax cuts, it is questionable whether these can be substantially reduced through negotiations with individual countries. Additionally, taxes on specific industries such as automobiles are considered a separate issue; resolving these problems may take longer.
The US appears to have strong intentions to correct the weak dollar. The Bank of Japan’s monetary policy, which still maintains negative interest rates, is seen as a root cause of the yen’s depreciation.
The market interpretation is that a possible economic downturn could reduce inflationary pressure, justifying the Bank of Japan’s decision not to hike rates further at its next policy meeting in May. However, I continue to view an accommodative interest rate level itself as a strong reason for another rate hike.
Softer impact on exports?
The big focus is on the implications for Japan’s exports where a myriad of factors means measuring the impact is challenging. Over the past 30 years, Japanese companies have localised their businesses in the US, while at the same time expanding them globally, with the aim of reducing dependence on trade with any single country.
Exports from Japan to the US constitute only around 20% of total exports, of which only circa 30% are automobiles. What is important is whether businesses have a competitive advantage and pricing power. Those with competitive products may be able to absorb the costs of tariffs by setting higher prices, and still potentially be able to increase their market share. Elsewhere, the impact on software sectors like computer games and music is considered minimal, which could lead to these areas outperforming. Companies reliant on domestic demand that have absorbed the effects of a significant devaluation of the yen through corporate efforts such as increasing productivity and efficiency, and by offering product and services innovation, could greatly benefit if the exchange rate shifts.
Japan has long been a strategic partner for the US
In US-Japan relations, there have been few fundamental conflicts, with collaboration offering significant benefits. Japan has been the largest foreign investor in the US for five consecutive years, and is also the largest holder of US Treasury bonds. From a long-term perspective, Japan’s geopolitical position is also of crucial strategic importance for the US, with around 130 US military bases in Japan – with Japan covering more than 80% of the operational costs.
Every cloud has a silver lining
Amid the gloom and doom of ‘tariff Armageddon,’ there are some positives. While tariff negotiations involving many countries will take time, and lead to continued high volatility, should US policy lead to a trade regime change, it is likely to offer active investors opportunities to reassess their portfolios and identify new stock picks. Additionally, for non-yen investors, the potential reversal of the yen weakening trend is also a positive factor that should be recognised.
1 Bloomberg, TOPIX Index 3 – 7 April 2025. Past performance does not predict future returns. The TOPIX Index Value and the TOPIX Marks are subject to the proprietary rights owned by JPX Market Innovation & Research, Inc. or affiliates of JPX Market Innovation & Research, Inc.
Crowded trade: occurs when there is extremely strong investor sentiment (either very positive or very negative) affecting an asset/security price that has trended sharply in one direction, leading to very overweight positioning in the asset/security.
Monetary policy: aims to influence the level of inflation and growth in an economy. Monetary policy tools include setting interest rates and controlling the supply of money.
TOPIX: also known as the Tokyo Stock Price Index, is a capitalisation-weighted index of all the companies listed on the First Section of the Tokyo Stock Exchange and is widely regarded as a broad benchmark for Japanese stock prices.
Volatility: the rate and extent at which the price of a portfolio, security or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. The higher the volatility the higher the risk of the investment.
Zero-rate policy: when a central bank sets short-term interest rates at or close to 0% to stimulate economic activity by encouraging low-cost borrowing and access to cheap credit.
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
There is no guarantee that past trends will continue, or forecasts will be realised.
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Specific risks
- Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
- This Fund may have a particularly concentrated portfolio relative to its investment universe or other funds in its sector. An adverse event impacting even a small number of holdings could create significant volatility or losses for the Fund.
- The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
Specific risks
4 minute read
Key takeaways:
- Japanese markets were caught off guard by the high tariffs imposed by President Trump, undermining Japan’s long-standing relationship with the US, with financials bearing the brunt of the sell off.
- While current trade negotiations have sparked a relief rally, it is questionable whether an agreement can be struck given various factors at play.
- Amid the ongoing market turbulence, investors have a chance to re-evaluate their portfolios and look for stock-picking opportunities.
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