Economists at Morgan Stanley MUFG Securities express concerns about the potential impact of new U.S. tariffs on Japanese imports. A 25% tariff is set to take effect from August 1, higher than the 24% implemented in April, unless a new trade deal is reached.
Prolonged tariffs could negatively impact Japan’s economy by reducing exports and curbing capital investment. There is also a possibility of a new fiscal stimulus, with a support package potentially announced in autumn during an extraordinary session of Japan’s Diet following the Upper House election.
Impact on Export Sensitive Sectors
We view the recent increase in bilateral trade tensions as a direct drag on export-sensitive sectors within Japan. Markets had not fully priced in the durability of past tariffs, and now face escalation risk that could spill over into broader investor appetite. With semiconductor-related goods and auto parts on the tariff list, we expect more pronounced short-run volatility in import-export balances.
The impact is not merely theoretical. When capital flows respond to external shocks, derivative pricing often reflects sharp pivots, not gradual rebalancing. Expect funding spreads to widen if forward guidance from policymakers continues to toe the cautious line. There’s no concrete easing signal coming yet, and so near-term hedging will likely stay elevated.
Miyake’s expectation of a fiscal package indicates a shift toward domestic stabilisation mechanisms. That consideration anchors the yen from further downside, at least for the next few weeks. Should the government outline its spending intentions soon after the Upper House vote, markets might pre-emptively flatten curves, especially around the two-to-five-year segment.
Foreign exchange desks should also remain alert to any sudden reversal in USD/JPY positioning. With Japanese policymakers staying reactive instead of proactive, if tariffs go live without countermeasures, the yen may see defensive flows—albeit tempered by cautious BoJ statements. That dynamic brings down carry appeal, further influencing volatility pricing.
Implications for Equities and Fiscal Stimulus
Yamamoto’s view that exports will retreat amid weaker capital investment introduces a new filter we must now include in equity index models. Manufacturing-reliant firms, particularly those with higher North America exposure, could lag regional peers. The short interest on Japan-related indices might stretch, especially if upcoming earnings give even modest downgrades.
The near-term picture puts pressure on volatility traders to monitor deal timelines closely. Breakdowns in trade negotiations typically reprice faster in S&P futures than in Nikkei-linked contracts; that delay creates brief arbitrage windows but also forces a much closer read of headline risk around US-Japan discussions.
On the fiscal side, while no specific figure was shared, prior autumn stimulus efforts have varied between 2% and 3% of GDP. Should a number in that range be confirmed, duration risk will shift accordingly. That would recalibrate derivative trades on JGB swaps, particularly near the belly of the curve.
In the meantime, keep an eye on positioning imbalances across forwards—momentum-driven selling pressure may exaggerate initial reactions following any policy hints.
