Japanese shares climbed to a one-year high today as news broke of a US-Japan trade deal.
The headline tariff was announced at 15%, markedly lower than the 24-25% level president Donald Trump indicated in April, and more favourable compare to other automobile-exporting countries.
The Nikkei climbed over 3% with autos leading the gains, while the yen also climbed 0.2% against the dollar to 146.90 yen.
Richard Aston, portfolio manager of the Chikara Japan Income & Growth fund and the CC Japan Income & Growth trust, said today’s rally is a reflection an “easing of greatest concerns”.
“Highlighting its importance to both countries, president Trump has lauded the agreement of the ‘massive deal’ which introduces 15% ‘reciprocal’ tariffs as ‘perhaps the largest Deal ever made’. Japan remains a key partner of the US, both politically and economically, rather than a rival and the conclusion of a simple deal confirms the significance of this longstanding relationship to both countries in an increasingly uncertain world.
“The headline tariff is lower than the initial level touted, and our recent discussions with company management underscore the importance of the clarity this agreement now brings and will allow the appropriate operational decisions to be made. Almost all the companies we have spoken to are confident that any material impact can be offset by a combination of supply chain adjustments and price increases which will minimise any immediate financial repercussions.”
In reaction, Dan Hurley, portfolio specialist at T. Rowe Price, also added: “The recently concluded Japan-US tariff agreement sets US tariffs at 15% for most goods, including autos, which is viewed as a positive outcome, especially compared to other auto-exporting countries. The Japanese government will support $550bn in US investment to further bolster a number of industries.”
However, he noted: “Tariffs on steel and aluminium, as well as negotiations regarding increased defence spending, are not included in this agreement, as stated by Minister Ryosei Akazawa, who primarily handled the tariff negotiations.”
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PM resignation?
Sumitomo Mitsui DS Asset Management (SMDAM) has calculated the impact of the newly announced tariff rates on the Japanese economy will result in a GDP decline of -0.27% – they previously predicted a 17.5% tariff rate and 0.40% GDP impact.
“While this is not a negligible impact, it suggests that the risk of economic downturn in Japan due to tariffs is somewhat limited,” said a note from SMDAM Economic Research Group.
Speculation has since refocused on the continuation of the Ishiba administration. SMDAM’s research note added: “The resolution of a national crisis reduces the reasons for his continuation in office. It remains to be seen whether prime minister Ishiba will consider this as a final achievement before resigning or emphasise it as a success for his continued leadership.
“The Mainichi Shimbun reported that Ishiba will announce his resignation by the end of August. In opinion polls conducted by the Yomiuri Shimbun and Kyodo News… the approval rating for the Ishiba Cabinet fell to around 22%, the lowest level since its inauguration, with more than half of respondents believing that Ishiba should resign. It appears that the groundwork for Ishiba’s resignation is being laid.”
T. Rowe’s Hurley added the resignation of Ishiba would be seen as “market-positive” and “reducing the likelihood of the CDP – with more hawkish fiscal policies – joining the government coalition”.
“On a three- to five-year basis, we remain constructive on Japan equities,” he said. “Japan is an open and cyclical market, which will be subject to the health of global trade and economy. Japan also has deteriorating demographics. However, these issues are well known and very much in the price; valuations are not stretched by any means in Japan and trade near average.
“This trade deal with the US reaffirms the relationship on both strategic and economic levels. Corporate governance reform also continues to progress and provide considerable opportunities in Japan.”
