US tariffs of 15% on Japanese goods, particularly cars and auto parts, are anticipated to reduce Japan’s corporate earnings by up to 3%. This reduction in earnings could affect the spring wage negotiations scheduled for next year.
The Risk of Tariffs
Lowered corporate earnings may challenge the Bank of Japan’s ability to strategise future rate hikes for 2026. Concerns about the tariffs and their consequences on the economy have been expressed by Japan’s top trade negotiator, Ryosei Akazawa.
With talk of a 15% US tariff, the risk to Japanese corporate earnings is now firmly on the table for us. Given the Nikkei 225 has rallied over 20% year-to-date, hitting record highs earlier in 2025, it is vulnerable to a pullback on this news. We should consider buying Nikkei put options expiring in October or November to hedge against or profit from a potential downturn.
This development directly challenges the Bank of Japan’s path toward raising interest rates in 2026. A delay in policy normalization would keep the interest rate differential between the US and Japan wide, putting downward pressure on the yen. We are looking at USD/JPY pushing past the 160 level, a mark it hasn’t consistently held, making long positions in USD/JPY futures or call options an attractive strategy.
Opportunities and Strategies
Uncertainty around trade policy tends to spike market volatility, and we saw this playbook during the 2018 trade disputes. The Nikkei Volatility Index, currently sitting near a historically low 14, could see a significant jump in the coming weeks. Buying call options on the volatility index itself offers a direct way to trade the expected increase in market turbulence.
The tariffs are specifically aimed at cars and auto parts, which is a critical sector. The United States remains the largest single market for Japanese automakers, accounting for over 35% of all vehicle exports last year. Consequently, we see a clear opportunity in buying put options on major exporters like Toyota and Honda, as their earnings forecasts will be immediately threatened.
