A recent survey indicates that three-quarters of Japanese firms hold a positive view of the new US-Japan tariff agreement. This comes after Japan got concessions from the US, reducing planned import duties. The July agreement cut US tariffs on Japanese goods to 15% from a proposed 25%, and the auto tariff fell to 15% from 27.5%.
Mixed Reactions To The New Tariff Deal
However, the 15% auto tariff is still considerably higher than the 2.5% rate before the Trump administration. Around 38% of companies predict a negative earnings impact due to the deal, while 20% foresee a positive effect. For instance, Toyota reduced its profit forecast by 16%, whereas Sony increased its outlook by 4%, attributing this to less severe tariff impacts. The survey reveals that nearly all companies do not plan to change capital expenditure due to the agreement.
Additionally, the survey reports that 54% of companies plan to raise prices further to cope with increased costs. In contrast, 46% believe there is minimal room for more price hikes. Some companies have expressed concerns that higher prices are already suppressing demand and contracting markets.
We see the new US-Japan tariff deal not as a solution, but as a shift in risk. The Nikkei 225 saw a brief relief rally back in July after the announcement but has since traded sideways, reflecting deep uncertainty. This suggests that broad index bets may be less effective than more targeted strategies.
The split between winners and losers is becoming clear, creating opportunities for pair trades. We see potential in favouring electronics exporters, who cited smaller-than-feared tariff effects, over automakers facing a steep 15% tariff. Derivative traders could look at long calls on strong tech performers versus puts on exposed auto manufacturers.
The yen’s reaction tells a story of short-term relief followed by long-term concern. After strengthening post-deal, the USD/JPY has drifted weaker, now hovering near 148 as the market weighs the continued drag on Japan’s key export sector. We anticipate this currency weakness to persist as long as economic growth fears outweigh the tariff relief.
Inflation Concerns And Market Volatility
With over half of companies planning to raise prices, inflation remains a key factor for the coming weeks. Japan’s core CPI has remained stubbornly above the central bank’s target for much of 2025, complicating monetary policy. This environment makes interest rate derivatives, which can hedge against unexpected policy moves, increasingly relevant.
Looking back at the US-China trade war of 2018-2019, we saw that initial tariff announcements were often followed by months of heightened volatility. The current situation feels similar, suggesting that options strategies that profit from price swings, like straddles, could be advantageous. We expect the Nikkei Volatility Index, currently below its year-to-date average, to trend higher.
Attention must now turn to upcoming hard data to confirm corporate sentiment. The next Tankan survey will be crucial to see if business confidence is holding up after the initial relief. We will also be watching Japan’s monthly trade balance figures closely to measure the real-world impact of the 15% auto tariff on export volumes.
