Japanese Prime Minister Shigeru Ishiba expressed reluctance towards accepting US tariffs, particularly on cars, in his parliamentary address. He emphasised the importance of seeking mutually beneficial trade deals with the United States.

He mentioned Japan’s financial situation, stating it is worse than Greece’s, and opposed funding tax cuts with Japanese Government Bonds. Despite Ishiba’s comments, there was limited impact on the Japanese yen and the USD/JPY pair, which remained slightly above the 145.00 mark, down over 0.40% for the day.

Understanding Tariffs

Tariffs are customs duties on specific imports designed to give local producers a price edge over imported goods. Unlike taxes, which are paid at purchase, tariffs are prepaid at ports and are borne by importers.

There are differing economic views on tariffs, with some seeing them as protective measures and others as potentially damaging, risking higher prices and trade wars. Former US President Donald Trump plans to use tariffs to support the US economy, targeting countries like Mexico, China, and Canada, and aims to use tariff revenue to reduce personal income taxes.

Ishiba’s comments painted a sobering picture. While his firm opposition to U.S. tariffs may sound politically thematic, it’s grounded in economic unease. By underscoring the state of Japan’s public finances — even referring to them as worse than Greece’s — he signalled a very cautious stance on fiscal manoeuvres that could further strain Japan’s debt profile. The hesitance to plug revenue gaps via further issuance of Japanese Government Bonds speaks to a broader concern: unsustainable debt servicing and rising yields if confidence erodes.

For currency markets, the restrained response in the yen might appear a bit counterintuitive. Such statements, especially in contradiction to dovish central bank policies or ultra-accommodative fiscal spending, could normally support a currency through safe-haven narratives. However, that didn’t materialise here. Instead, the Japanese yen remained relatively soft, while USD/JPY hovered just above 145.00, still retracing over half a per cent lower for the day. The market has perhaps compartmentalised Ishiba’s view as politically anchored rather than indicating imminent policy shifts.

Impact of Tariff Policies

Let’s move back to tariffs now. It’s essential to understand them for what they are — not just policy tools tossed about in speeches or headlines, but mechanisms that affect consumption, margins, and ultimately pricing volatility, particularly in global-linked sectors. They are not a tax on buyers at the checkout but are imposed when goods cross borders, usually at the expense of the firms importing them. This often translates into margin pressures which, if absorbed, hit corporate profits; if passed on, feed directly into inflation.

Markets will be watching carefully. When someone like Trump floats the use of tariff revenue to cut individual taxes, this signals a resurrection of hard line protectionist economics. That can create asymmetries in equity and rate markets across trade-exposed jurisdictions. Pair this with Japan’s current fiscal sensitivity and consumption tax base, and the knock-on effects cascade into options pricing, especially where volatility regimes are tied to currency or geopolitical risk premiums.

Here’s why it matters in the near term. Positioning strategies must stay nimble, adjusting to the likelihood of tit-for-tat measures, even rhetorical ones, which have the power to shift implied vol and futures curves. Tariff policies don’t just affect the flow of goods; they touch on rate path projections by shifting growth and inflation expectations. That domino lands directly in currency forwards, skew risk, and gamma pricing. When tariffs are in play as headline drivers of macro policy, positioning gets more sensitive and triggers less forgiving in risk-off moves.

Don’t dismiss fluctuations in USD/JPY as noise in these conditions. If tariffs return as a policy focus, hedging appetites can quickly recalibrate — it’s less about the current spot moves and more about when the market begins recalculating forward differentials. Put another way: it’s about the reaction timing when trade dynamics intersect with a country’s capacity to finance domestic spending without tipping yield structures into instability.

So, the watchwords now are clarity of motive and readiness of action. That means keeping positions flexible and managing calendar spreads with heightened awareness of both trade policy developments and fiscal commentary from Japan.

Create your live VT Markets account and start trading now.