Daiwa Securities predicts Trump’s proposed 25% reciprocal tariffs on Japanese goods could lead to a 1.1% cumulative decrease in Japan’s real GDP. The firm’s economists forecast a real GDP growth of 0.1%–0.2% for FY2025, down from 0.8% in FY2024.
The tariffs are not expected to cause a major shock, but persistent labour shortages may keep inflationary pressures high. Consequently, the Bank of Japan is expected to maintain its gradual interest rate hikes instead of easing the policy in response to the potential slower growth.
Economic Impact Assessment
Daiwa’s team have outlined a potential economic drag from the proposed tariffs, estimating a cumulative 1.1% fall in Japan’s real GDP if the plan goes ahead in its current form. Their updated projection for growth in the next fiscal year has now been slashed to between 0.1% and 0.2%, a notable slowing from this year’s 0.8%. They maintain that while the impact from tariffs alone isn’t expected to cause any abrupt disruption, the longer-term pressure may build gradually through export-heavy sectors.
This assessment also factors in labour market tightness. With fewer workers available across industries, costs may remain high, feeding directly into consumer prices. Despite slower growth forecasts, prices are unlikely to soften meaningfully. As a result, Ueda and his colleagues are unlikely to reverse course on monetary tightening. Markets should not anticipate any loosening of policy as a short-term response to weaker output figures.
For those of us analysing derivatives, the signal is clearer. Exposures tied to yield volatility, particularly within Japanese government bonds and related instruments, may need to be reweighted. Yield curve steepening could gain traction if the central bank shows no sign of stepping in to cushion growth. The next set of inflation data and quarterly Tankan survey results will be important triggers. Option pricing may adjust quickly as rates are presumed to remain on a narrow upward path.
In equities, consideration must be given to sectors reliant on foreign demand, including manufacturing names with broader exposure to North America. Short-dated hedges may offer limited downside coverage if trade rhetoric escalates. Conversely, domestic-facing firms might warrant selective long positioning where pricing power remains firm.
Future Strategy and Planning
Looking further ahead, it would be prudent to monitor how corporates adjust capex and inventory guidance. If trade threats begin to influence corporate planning into 2025, second-order effects could push earnings volatility higher—particularly for exporters in transport and machinery. Moves in the yen could also become more knee-jerk, another area of focus in FX futures strategies.
All else equal, the Bank of Japan’s caution tells us something. Policy is being managed with an eye on structural conditions, not temporary shocks. Fixed income traders should frame positions with that in mind and plan carry trades accordingly. Swap spreads could widen on the margin if inflation persistence outpaces output risks. This tilt in tone may endure over the next quarter.
