Trump's tariffs could hit Tokyo's bull market

The Nikkei 225, the Tokyo Stock Exchange index, fell 0.56 percent on Wednesday, snapping a five-session winning streak. Investor sentiment was negatively affected by comments from U.S. President Donald Trump. He said he was not certain that an agreement with Japan would be reached by July 9. "Japan may have to pay 30 percent or 35 percent tariffs. We will set a specific number because we have a very large trade deficit with Japan," the U.S. president said.

The United States had a $69.4 billion trade deficit with Japan last year. On April 2, Trump, announcing the so-called reciprocal tariff mechanism, imposed a 24 percent tariff on Japan, but later temporarily reduced it to 10 percent. So why is he now threatening to impose an even higher rate on Japan, reaching up to 35 percent?

These aren’t threats, just Trump’s irritation?

Analysts say these threats should not be taken literally. However, they are an expression of Trump's irritation with the difficult negotiations with Japan. The Japanese government, led by Shigeru Ishiba, has adopted a tactic of stubborn but polite negotiations, abundant in bilateral meetings. The government has a difficult task, because parliamentary elections are to be held in Japan on July 20. Ishiba's cabinet is therefore keen to avoid a bad trade agreement with the US, and at the same time does not want a confrontation with Washington (if only because the US is the guarantor of Japan's security). While the Japanese do not like the tariffs imposed by the US on cars from around the world, Trump holds the Japanese at fault for not buying enough American cars and rice.

"The ball is in Japan's court now. If Tokyo hesitates, it's all over. If Japan doesn't respond to Trump's call properly, it will make him more hostile. Ishiba should call him soon," said Chihiro Ota, a strategist at SMBC Nikko Securities.

"The government is caught between American expectations and domestic pressure not to give the U.S. too much before the election. The message from the Trump administration is that it wants something big. The Japanese are just putting things together and hoping it holds," said Rintaro Nishimura, an analyst at The Asia Group.

The Japanese government has so far offered the Americans larger purchases of their gas, as well as cooperation in the development of the shipbuilding industry and the production of semiconductors.

"We have to work on Trump himself to try to avoid tariff increases on July 9. We don't have anything like rare earths , but the U.S. is also dependent on Japanese industry. About half of the materials for semiconductor production come from factories in Japan," said Ichiro Fujisaki, a former Japanese ambassador to Washington.

Tokyo must negotiate with Trump

Analysts point out that a possible collapse of US-Japan trade negotiations would be a blow to the Tokyo stock market.

"The risk of things falling apart is greater than the market currently estimates. There is always a risk that one side will make a big mistake," notes Zuhair Khan, a manager at UBP Investments. He recalls that after Trump announced the mechanism of the so-called reciprocal tariffs, the Nikkei 225 fell from around 36,000 points to around 31,000 points. It ended Wednesday's session at 39,762 points. "Assuming a 25 percent risk that a trade deal will not be reached, the Nikkei 225 should currently be around 38,000 points," Khan believes.

At the end of June, the Nikkei 225 was still above 40,000 points. It has fallen by 0.3 percent since the beginning of the year, which made it perform poorly in comparison to other stock market indices on developed markets. However, it has rebounded by almost 28 percent since the April low. So we can talk about a bull market on the Tokyo stock exchange.

Meanwhile, the Japanese yen has gained 9.6% against the US dollar since the beginning of the year. On Wednesday afternoon, 1 dollar was worth 143.8 yen. The Japanese currency was at its strongest in late April. At that time, it was quoted as high as 139.89 yen for 1 USD. This was the lowest rate since July 2023. However, the strong yen is a factor that has a negative impact on the economic situation on the Japanese stock market. It contributes to lower margins for Japanese exporters, which dominate the Nikkei 225 index. The weakening of the Japanese currency is often an impulse for the growth of this stock index.