As the clock ticks towards 1 August and tariffs weigh over global markets, the agreement reached with Japan marks the most significant deal since President Donald Trump announced his “Liberation Day” tariffs in April.
Global uncertainty has been disproportionately impacting Japan, compounded by anxieties surrounding the upcoming election, according to asset manager Federated Hermes.
However, with these issues easing in quick succession, senior portfolio manager at Federated Hermes, Lewis Grant, said Japanese equity markets have quickly shown a positive reaction – with the Nikkei rising shortly after President Trump’s announcement.
“We remain bullish on the region and we view the Japanese banks as a good place to gain exposure,” he said.
Of course, neither country walks away from the deal completely satisfied, Grant explained.
While Japan would have wanted a blanket tariff at 10 per cent, they couldn’t hold out long enough. By giving in, they successfully sidestepped a potentially devastating 25 per cent tariff on autos.
At the same time, the US would have wanted more concrete access to Japan’s market, but a higher tariff rate with a key partner, as well as the commitment of Japanese investment in the US, will provide President Trump with valuable and much-needed positive press.
“There are parts of the deal that are mutually beneficial too; Japan needs rice and US farmers can provide,” Grant said.
And as inflation returns in Japan, he said he anticipates that interest rates will rise gradually and carefully and, since the benchmark rate remains low, any rate increases will significantly boost the banks’ earnings per share (EPS).
Regarding the Japanese political situation, he predicted that Prime Minister Shigeru Ishiba might use the deal to regain some political capital, particularly after reports – which he later denied – that he plans to resign over a historic defeat of his Liberal Democratic Party over the weekend.
However, as Grant observed, “nothing says your job is in trouble like having to announce that it is, indeed, not in trouble”.
“His coalition may have outperformed expectations but some of the uncertainty has been delayed rather than resolved,” he said.
Ultimately, while the perfect deal wasn’t reached, the new tariff agreement provides clarity for the Japanese economy and will improve sentiment in the banking sector, according to Grant. He said this should be a lesson for other countries.
“We expect the EU to take note and use Japan’s example to guide their negotiations; they can still get a good deal but will need to make a sacrifice or two to allow President Trump to proclaim a win and write his headlines,” he said.
Grant added that equity markets are already rising amid widespread optimism that a deal can be reached, signalling what is hopefully the “final act” of the trade war.
BofA Securities similarly expects Japan’s deal to act as a benchmark for other countries negotiating with the US and predicts it will help spur progress.
“If other major nations also aim to agree on a 15 per cent tariff, the outcome will likely be at least that level, if not higher, which would be positive for Japanese firms’ competitiveness,” the investment bank said in a recent update.
Japanese firms are also likely to accelerate moves to optimise their pricing strategies now that tariff assumptions are locked in, it added.
“EPS would improve if they can gradually raise prices. Thirdly, consensus EPS forecasts likely factor in almost the entire impact of tariffs. We therefore think EPS forecasts may be close to bottoming out.”
