A WORD ON
Japan and the trade war
Manager of Japanese and Asian equities
OFI INVEST ASSET MANAGEMENT
Japan is running a trade surplus with the United States, amounting to about $68.4 billion in 2024, according to figures from the US Census Bureau. However, this surplus has shrunk in recent years, as Japan now produces much more in the US.
In our view, the tariff hikes, including a 24% rate on Japan announced in early April, is a negotiating base in accordance with Donald Trump’s doctrine, drawn from his business experience and developed in his book The Art of the Deal.
Japan has understood that taking on Trump is risky and prefers to focus on Japanese companies’ investments in the US and Japan’s need for natural resources, particularly natural gas, which could be imported from the US. That’s why the LNG that the US supplies to Japan has been a topic of discussion. The US is, in fact, Japan’s fourth-largest natural gas supplier, providing about $44 billion worth, or 8% to 10% of Japan’s needs. If this percentage were to rise to 25%, the trade deficit between the two countries would vanish, something that could weigh favourably in negotiations.
Meanwhile, Trump and Japanese Prome Minister Shigeru Ishiba have raised the possibility of $1,000 billion in Japanese investments in the US, even as Japan has already been the largest foreign investor in the US over the past five years, at about $800 billion annually.
Japan remains a key ally to whom Washington is likely to cater amidst a tense geopolitical context – an ally who consumes a huge amount of American goods and who is closely tied to the US militarily and strategically.
Beyond bilateral negotiations, tensions with the US could encourage an acceleration and strengthening of trade agreements within Asia, and between Asia and Europe. But it is still too early to do without this now very bellicose trade partner.
smaller Japanese automakers would be hardest hit, such as Nissan* or Honda*, which, for example, makes 200,000 vehicles in Mexico and exports 80% of them to the US. But Ford* would be harder hit than Honda*, as well as General Motors*, which produces 890,000 vehicles in Mexico and exports about 75% of them to the US. Negotiations therefore still have a long way to go, given that it is US automakers that would be hurt the most.
As for the largest Japanese automakers, Toyota Motors*, which has manufactured in the US for the past 40 years at 10 sites and with 170,000 direct and indirect jobs, is far less affected.
Deflation lasted several decades. Japanese consumers are accustomed to saving and to deferring their purchases until prices fall. Pulling out of this deflationary trap is not as fast as the Bank of Japan might wish. Last year, inflation hit 4%, a 33-year high. It is now about 2%, which is the target of the Bank of Japan (BoJ).
However, the return of inflation is not enough to restart consumption. Japanese consumers must also have the means to keep up with these higher prices, which will require wage hikes. A virtuous circle is taking hold and should promote consumption, which does account for about 50% of the Japanese economy. To cite one example, the spring 2024 shuntō wage negotiations produced increases of 5.1%, the largest increases in more than 30 years!
Small and mid-sized companies don’t have the wherewithal to absorber this additional cost in the short term. They are instead waiting for a trickle-down effect from the large companies that source from them.
Japan’s “normal” pace of growth is less than 1%. Because of its export-intensive profile, Japan depends on the sound economic health of its trading partners. But in addition to exports, new industries are developing in Japan, particularly in tourism and technology.
In 2024, almost 37 million tourists visited Japan! Shinzo Abe was the one who launched this trend when he took office in 2012. The government’s goal is 60 million tourists in 2030, which would be an important boost to domestic consumption, in particular in food, hotels and retailing, but also a source of inflation, in food in particular.
The ageing of the population, which is a concern, may also be seen as an opportunity to rapidly develop robotics, whether in hardware with robots or software in artificial intelligence. Japan is already the leader in manufacturing industrial robots.
Meanwhile, in late 2024, the government decided to launch a $65 billion plan to support the semiconductor industry and artificial intelligence, a plan that is likely to generate more public and private investment in the coming 10 years. One goal is to make Japan a go-to actor in the global semiconductor chain in the coming years.
We are also seeing a shift in paradigm in distribution of dividends to shareholders. This was the third arrow of Shinzo Abe’s programme, and it has taken time to become reality. Better shareholder returns are necessary for financing pension and retirement funds. As a result, the practice of cross-shareholdings, which is very common among large Japanese companies, is beginning to give way to share buybacks and higher dividends, which is good news for the Japanese equities market.
After rallying in 2023 and 2024, Japanese equities have suffered a significant correction due to the resurgence of US trade risk. But Japan’s domestic and structural fundamentals remain on solid ground.
- The Trump administration’s early April announcement of reciprocal tariffs triggered a 21% drop in the Topix within a few trading sessions.
- Nomura estimates that the combined impact on 2025 results of Topix companies could be as great as -14% (-7% from the tariffs themselves and -7% from the global economic slowdown). In our view, this is a worst-case scenario. Our baseline scenario assumes that Japan will negotiate and not get into a head-to-head confrontation with Donald Trump.
- So, the market appears to have priced in tariff-related stress, with valuations assuming a prudent scenario.
- Nikkei 225 futures has come in for massive short-selling, mainly by non-resident investors.
- In contrast, Japanese companies themselves have moved back to long exposures via record share buybacks.
- Individuals, via the new NISA regime(1), continue to support domestic flows.
- The market looks attractive on fundamentals:
- The Topix’s 12-month forward P/E(2) is 13
- Its price-to-book (P/B) ratio(3) is 1.2
- Its dividend yield is 2.8%
- Such levels are consistent with a slow-growth environment. As we see it, the current excessive pessimism may offer a historically attractive entry point.
- The dividend payout ratio for 2024 is projected at 36.7%, with 77.2% of companies expecting to raise their dividend, which enhances Japanese equities’ attractiveness as a vehicle for returns in a world that is still uncertain.
- Japan is strengthening its stance in critical the technological chains of AI and semiconductors, with a positive impact on semiconductor production equipment (SPE), a pillar of the Japanese industrial fabric.
- The energy transition, robotics and ageing of the population also generate pockets of innovation and stable demand, particularly in automation, cybersecurity and healthcare services.
- The gradual return of inflation, alongside wage increases, is supporting sustainable domestic growth.
- The rebound in tourism is providing an important boost to consumption, in particular in food, hotels and retailing.
- Banks are benefiting from a gradual increase in domestic interest rates.
- The healthcare sector is improving against a backdrop of normalisation from exceptional post-Covid losses and product innovations.
- Despite heightened international tensions, political uncertainty remains much less pronounced in Japan than in the US or China.
- The BoJ continues to take a conservative approach to monetary normalisation. Despite the yen’s weakness (which boosts tourism), it must also account for the strength of the domestic economy and the risk of nipping the recovery in the bud by raising its rates too fast. So, striking a balance between combatting the yen’s depreciation and supporting the Japanese economy remains a tightrope walk.
- In the run-up to elections in the upper house (in July 2025), fiscal stimulus measures are being planned to support growth.
Completed on 22/04/2025
* Companies are cited for information reasons only and neither as an offer to sell, nor a solicitation to buy securities.
(1) The new NISA regime in Japan, launched in January 2024, is an enhanced version of the tax exemption programme for small individual investors. It aims to encourage households to build up stable wealth and to invest for the long term.
(2) The 12-month forward P/E is a financial indicator that measures the ratio between a company’s current share price and its estimated earnings over the next 12 months.
(3) The price-to-book ratio (P/B) is a financial indicator that compares a company’s current share price to its book value per share.
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