Tokyo stocks hit by a perfect storm of tariffs, politics and budget worries

Japan Times

3 days ago

Japanese stocks have been stuck trading below their peak for more than a year, hit by the trade war, then by political instability and increasingly by fiscal concerns.
The Nikkei 225 index is down 3.87% on year, and off by more than 6% from its record of 42,426.77 reached on July 11, 2024.
This comes as indexes globally are rallying, with the Standard and Poor's 500 and the Nasdaq Composite indexes in the U.S., Germany's DAX and South Korea's Kospi all at or near records.
Bonds in Japan are also faring poorly, hit by a rout in late March and early April as the reality of U.S. President Donald Trump's tariffs started to hit home. They retreated again this week ahead of Upper House elections scheduled for July 20.
"It seems there's still significant uncertainty surrounding the tariffs,' said Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management.
Earnings season in particular is weighing on sentiment, as the effects of the trade war might start to show up in results. Sales might drop for some companies due to higher U.S. duties, while profits might fall at companies that chose to cut prices to maintain sales.
Most Japanese goods bound for the United States are subject to 10% tariffs, while cars are charged 25% and steel and aluminum 50%. Japan and the United States have made no significant progress in tariff negotiations despite months of dialogue. Talks have been on the verge of breaking down at some points, adding to the confusion.
'The tariffs on automobiles, a core industry to the Japanese economy, have led to the underperformance of the auto sector," Ichikawa added.
Toyota shares are down 22.55% over the past year, while Honda is off 10.50%.
Eiji Sato, portfolio manager at Nakano Asset Management, said that investors want to confirm that companies are still growing and increasing profits before jumping heavily into stocks again.
'With the earnings season approaching, it seems a wait-and-see stance is spreading,' he said.
Politics are weighing especially heavily on the markets.
Some polls indicate that the Liberal Democratic Party-Komeito coalition could lose its majority in the upper chamber of parliament this weekend. The coalition failed to win a majority in the Lower House election last October.
If they become a minority government, instability could follow. A scramble to pull together a workable coalition might result in a period of policy uncertainty, while negotiations with the United States over tariffs could stall completely if there's a leadership vacuum.
Prime Minister Shigeru Ishiba might step down.
If opposition parties gain more power after the election, the government will be under intense pressure to introduce a number of expensive policies. These include cutting the consumption tax — currently set at 10% for most products and 8% for food items — to help households make ends meet.
The possibility of measures like this have increased concerns about Japan's fiscal health.
'If the scenario were to take a turn to the downside, I believe Japanese stocks would likely be forced into a correction phase after the election,' Sato said.
The bond market has been rattled ahead of a possible shift to looser fiscal policy.
The 30-year Japanese government bond yield surged to a record 3.2% on Tuesday, while the 20-year yield jumped to 2.65%, its highest level since November 1999. The benchmark 10-year yield climbed to a 17-year high of 1.595%. Bond prices move inversely to yields.
Analysts said that stocks aren't likely to start rising again until the fall.
Since tariffs will eventually drag down the U.S. economy, economic indicators will likely show signs of a slowdown after the summer, Ichikawa said. If that happens, calls for rate cuts by the U.S. Federal Reserve are expected to grow, and rate-cut expectations will strengthen the view that the economy will recover next year, which could help stock performance, he said.
Sato also pointed out that once uncertainties over the Japanese political situation and the U.S. tariffs clear after the summer, Japanese stocks could enter another upward phase. He added that a number of Japanese companies are tackling corporate reforms to improve stock value.
'We interview a lot of companies every quarter and are really seeing changes within their businesses. Thus, we have high expectations for them,' he said.